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Level 1

If you take money out of your 401k but some of the funds were in an ESOP account, do you have to pay 10% on ESOP funds?

 
4 Replies
Level 1

If you take money out of your 401k but some of the funds were in an ESOP account, do you have to pay 10% on ESOP funds?

On the tax help section it says - if the money you took out was from ESOP employer stock dividends you may not have to pay the addition tax - if this applies to you enter the amount you took out from ESOP dividends next to OTHER REASON and we ll let you know how this changes your taxes I am confused thank you
Level 20

If you take money out of your 401k but some of the funds were in an ESOP account, do you have to pay 10% on ESOP funds?

Funds (shares) in an ESOP account are not dividends, although the shares can pay dividends that are not subject to penalty.  It would be unusual and incorrect for the plan to make a distribution of ESOP dividends and report it with any code other than code U which TurboTax knows to treat as not subject to penalty.  If the dividends on ESOP shares are reinvested in the plan (likely into a 401(k) plan of the employer), they cannot be treated as a code U dividend distribution when distributed later.  A distribution of ESOP shares themselves is not a dividend distribution.
Level 1

If you take money out of your 401k but some of the funds were in an ESOP account, do you have to pay 10% on ESOP funds?

Understood Thank you
Level 20

If you take money out of your 401k but some of the funds were in an ESOP account, do you have to pay 10% on ESOP funds?

There is no difference between the tax consequences of a regular distribution from a 401(k) and a regular distribution from an ESOP account.  Both are qualified retirement plans.  If the distribution was an early distribution (before age 59½) and you have no penalty exception that applies, the distribution from either account is subject to an early-distribution penalty on the taxable amount.