I withdrew money early from my 401k plan, but it was money I already paid taxes on before it went into my 401k plan. Shouldn't I only be penalized on the earnings ?

[MichaelDC · Accepted solution]

It's a little more complicated than that. Since 1986, the law requires that any withdrawals made of after-tax monies from a qualified plan must have a proportionate amount of earnings attached to them.

Assume a participant with a $15,000 after-tax balance in her account – $10,000 of which is principal (non-taxable) and $5,000 of which is earnings (taxable). Since the $5,000 in earnings represents one-third of the overall $15,000 balance, that means that any withdrawal she takes of after-tax dollars must consist of roughly 33% in earnings. In other words, 33% of whatever withdrawal she takes will be subject to ordinary income tax AND a 10% early withdrawal penalty.

It's hard to tell what the issue is without knowing more about your return. On top of the above explanation, check if there's a difference between box 1 and box 2a and ensure the code in Box 7 is correct.

If you have any other details regarding this question, please feel free to post them in the comment section. 

[ctep123]

Box 1 is much more than box 2a. 2a shows taxable amount of 553.95, but yet I'm penalized some 770 dollars. Just doesn't seem right.

[MichaelDC]

Thank you. And Box 7? When you say penalized, what's line 59 of 1040? Do you have ANY other 1099Rs?