Do we have to pay a 10% penalty? My wife turned 55 in July 2017 and laid off October 2017. We cashed out her 401K. What about the Age 55 Rule?

Federal Taxes (20%) were taken out before we received cash from her 401K.

The distribution code reflecting on the 1099-r is "1" Shouldn't the distribution code reflect "2"?

Her plan administrator claims we are not being charged a 10% penalty. But it shows differently on Turbo Tax.

Best answer by CarolC

No. Because your wife made the qualified plan distribution after age 55, there is an Exception to the early distribution 10% penalty.

Click this IRS link Retirement Topics - Exceptions to Tax on Early Distributions to see all possible exceptions available. Form 5329 must be completed to claim a penalty exception.

Follow this path to complete Form 5329 in TurboTax:

Federal Taxes>>Other Tax Situations>>Additional Tax Payments>>Extra Tax on Early Retirement Withdrawals>>Start.

Note: Public Safety Officers can qualify for the exception at age 50.

Level 7

No. Because your wife made the qualified plan distribution after age 55, there is an Exception to the early distribution 10% penalty.

Click this IRS link Retirement Topics - Exceptions to Tax on Early Distributions to see all possible exceptions available. Form 5329 must be completed to claim a penalty exception.

Follow this path to complete Form 5329 in TurboTax:

Federal Taxes>>Other Tax Situations>>Additional Tax Payments>>Extra Tax on Early Retirement Withdrawals>>Start.

Note: Public Safety Officers can qualify for the exception at age 50.