All withdrawals from a traditional 401(k) are subject to regular income tax. The withdrawal is also subject to a 10% penalty unless you are over age 59-1/2, or you can certify that you suffered a Covid related hardship as defined in the CARES act. Any withholding at the time of the distribution was only an estimate and you must report the distribution on your tax return using the form 1099 – R that will be sent to you by the broker or that you can download from your brokers website.
When you enter the 1099 – R, you will be asked if any special circumstances apply. There will be a box to check that this is a coronavirus related distribution, and if you check that box, you will not be charged a 10% penalty. You will also be offered the opportunity to spread the distribution out over three years. TurboTax will create the necessary forms to do this. If you don’t spread the distribution out, then you probably did not have enough taxes withheld and you will owe more taxes. If you do spread out the distribution, then you probably will get a refund this year because the 20% withholding was more than your tax, but you must be prepared to pay the additional tax in the next two years.
this section of TurboTax is not ready yet because the IRS has not completed its work finalizing the new forms and has not approved TurboTax to release an update containing these forms. It should be available sometime before January 27, but we don’t have any more specific information on that. The broker is not required issue the 1099 – R until January 31.
