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dpcurtis
New Member

Hi, I cashed out my 401k from Fidelity but the tax should have been deducted when I withdrew. Why are my taxes from stock sales so high?

Fidelity should have held the necessary amount with I cashed out my 401k.
2 Replies
re2boys
Level 9

Hi, I cashed out my 401k from Fidelity but the tax should have been deducted when I withdrew. Why are my taxes from stock sales so high?

Fidelity would have no idea what the tax would be on your 401k withdrawal.  It depends on family size, other income, your deductions, etc, etc, etc.   That is why you do a final reporting and reconciliation by filing an annual income tax return.

So, in anticipation that your taxes may go up due to the 401k withdrawal, the government has them withhold part of the distribution for income taxes, just like from your regular paycheck. Under certain conditions, you have the option to decline withholding, at your own risk.   At the end of the year, you may owe more, or may have overpaid and get a refund.

IreneS
Intuit Alumni

Hi, I cashed out my 401k from Fidelity but the tax should have been deducted when I withdrew. Why are my taxes from stock sales so high?

Did you receive both a 1099-R and a 1099-B from your brokerage?  If so this could result in a double entry of the transactions. If you received both documents, enter the 1099-R in TurboTax and not the401k information from the brokerage statement.

 

Keep in mind, also, that there will be a 10% early withdrawal penalty if you're not yet 59-1/2 and do not meet one of the exceptions listed in the instructions for Form 5329:

1. A distribution due to leaving your job in or after the year you reach age 55 (age 50 for qualified state or municipal public safety employees). This exception doesn't apply to distributions from IRAs, annuities or modified endowment contracts. You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50.

2. A distribution that's made to you as part of what are equal periodic payments over your life (and that of your beneficiaries). If the distributions are made from a qualified plan, those distributions have to begin after you leave your job (that provides you the plan). The payments generally cannot be changed for at least 5 years (or until the person reaches age 59-1/2, if later) in order to avoid the penalty.

3. A distribution due to permanent and total disability.

4. A distribution due to death. This exception doesn't apply to modified endowment contracts, though.

5. A distribution which you used to pay medical expenses. This one's tricky, though. They have to be medical expenses that are otherwise deductible. It doesn't matter whether you actually end up itemizing deductions for eligibility for this exception. This exception doesn't apply to distributions from annuities or modified endowment contracts.

6. A distribution made to someone else, usually an ex-spouse, under a qualified domestic relations order (QDRO). This usually results from a divorce agreement. And this exception doesn't apply to distributions from IRAs, annuities or modified endowment contracts as well.

7. For distributions from IRAs, the penalty tax may not apply on the amount of the distribution used to pay for medical insurance for yourself, your spouse, and your dependents. However, all four of the following conditions must apply:

  A. You lost your job.
  B. You received unemployment compensation for 12
  consecutive weeks.
  C. The distribution was made in the year you received.
  unemployment compensation or the following year
  D. The distributions are made no later than 60 days
  after you have been reemployed.

This does not apply to annuities or modified endowment contracts.

8. For distributions from IRAs, the penalty tax may not apply on the amount of the distribution used to pay for higher education expenses.

9. For distributions from IRAs, the penalty tax may not apply on the amount of the distribution used for a first home purchase. However, this is limited to only $10,000.

10. A distribution due to an IRS levy.

11. Qualified distributions to reservists while serving on active duty for at least 180 days.

12. There are other exceptions that may apply to you. These are listed in Publication 575 (Pension and Annuity Income) which you can request from the IRS.


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