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If we took money from our 401k, how will this affect our tax return?

2 Replies
Employee Tax Expert

If we took money from our 401k, how will this affect our tax return?

It depends.  For Federal purposes, a 401(k) distribution is taxable income at your marginal (tax-bracket) rate.  In addition, if you are not 59 1/2 years of age or older at the time of taking the distribution, the distribution can be subject to an additional 10% penalty as an "early distribution.  If you normally are able to claim the "Saver's Credit" (a credit of up to 50% on the amount you contribute to your 401(k) in the year, depending on your income level), the distribution will probably disallow the credit from being claimed.  These consequences are avoided, however, if you are rolling over the distribution into another type of retirement plan.  (Either another 401(k) or an IRA, for example.  See your Plan Administrator for details if you are interested in rolling over the distribution).


The distribution may also be taxable to your state as well, depending on your state and the reason for the distribution.


For a consideration of exceptions to the early-distribution penalties, please click on the following link:  Exceptions to penalty.  

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Level 15

If we took money from our 401k, how will this affect our tax return?

(OK...if you did not rolllthe distribution into another retirement account within 60 days of the distribution)


1)  The distribution is added to all of your other income and is taxed just like any other ordinary income.

2) the extra income may push you up into a higher tax bracket...but remember that only the portion that exceeds each  bracket step is taxed at each next higher tax rate.

3) IF the individual who owns the account, was less than age 59.5 when the distribution was made, an additional 10% tax penalty on the $$ distributed will be added your taxes.  (With only rare exceptions).

4)  Any withholding done by the administrator when they issued you the $$, will be noted on the 1099-R that they will issue in Jan of 2020.  You will enter that 1099-R form in your tax return, and that withholding is added to all your other tax withholding and will applied against any and all taxes (plus the 10% penalty...if applicable) in your tax return.  If all your withholding exceeds the total taxes assessed, you may still get a refund....but if the extra income pushed your taxable income into a higher tax might owe more when you file.  A lot depends on your other withholding  (excess or insufficient), and what tax brackets you end up in.

*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*
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