How does withdrawing my 401k early impact taxes?

[Major1096]

I have a 401k from a previous job that’s just sitting there. I already have another 401k going through my current job. Rather than rolling my old one into a new one, I’m considering withdrawing the funds. My car died this year and I had to get a new one and take out a loan for it. After taxes and the penalty fee, I should have enough to payoff my loan and have several thousand left over to open an Ira account, but fidelity told me I may still have to pay more when I file my taxes, even though they said they’ll withhold and send however much is owed for the taxes and penalty fee when I withdraw it. If I pay the taxes and fee separately how does taking the money out impact filing and potentially mean I owe more when I file?

[xmasbaby0]

The amount that Fidelity withholds will only be an estimate of the tax owed for the money you take from the 401k, just like the amount withheld from your paychecks is an estimated amount withheld by your employer.   If you are younger than 59 1/2 there is an early withdrawal penalty of 10% and ordinary income tax for the money you take from the retirement account.  You will receive a 1099R for that at tax time which must be entered on your tax return.   

When you enter all of your income and all of the tax withheld, the software reconciles those amounts to calculate whether you get a refund or owe more.

[Major1096]

That makes more sense. The fidelity rep I spoke with couldn’t explain when I ask, so I was confused. Thanks for clarifying 

[VolvoGirl]

Because taking the withdrawal may push you into a higher tax bracket when you add it to your total income.  You will get a 1099R at the end of the year to enter into your return.  The Gross amount shows up on 1040 line 5a and the taxable amount on 5b. The withholding will show up on 1040 line 25b.

It has to break out and show the 10% penalty separately on your return (schedule 2 line 8 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.

Now what about a IRA?  You have 60 days to roll over some of it to a IRA.   That will reduce the tax on it so if the withholding was on the full amount you may get a refund on your tax return.  When you enter the 1099R it will ask what you did with it.  You can enter the amount you rolled over to IRA.