401 K distribution from previous employer

[stes25]

So my previous employer sent me a 401 k distribution as my balance was under the amount needed to keep it open.  The check sent had federal taxes taken out.  How would this need to be reported on my taxes for this year.  I am not eligible to roll this over to my new employer as of yet plus the taxes were taken out.   Can i just keep the money without penalty since there were taxes removed

[RobertB4444]

You will receive a 1099-R from the financial institution that manages the 401K.  You will receive that by January 31st provided the distribution occurred in 2022.  

You need to include that 1099-R on your tax return for 2023.  All of the distribution that you received is taxable and the taxes with held from the distribution will go towards paying them.  

@stes25 

[DoninGA]

You will receive a Form 1099-R later in January or early February from the prior employer for the distribution from the 401(k).  There will be an amount of the distribution, the taxable amount of the distribution and federal income taxes withheld on the form.  You report the Form 1099-R on your 2023 tax return if the distribution occurred during 2023.

If you are under the age of 59 1/2 when the fund were distributed there will be a 10% early distribution penalty assessed on your federal tax return, Form 1040.

To enter, edit or delete a form 1099-R -

Click on Federal Taxes (Personal using Home and Business)
Click on Wages and Income (Personal Income using Home and Business)
Click on I'll choose what I work on (if shown)
Scroll down to Retirement Plans and Social Security
On IRA, 401(k), Pension Plan Withdrawals (1099-R), click the start or update button

[Bsch4477]

You will receive a 1099-R which will report both your distribution and the tax withheld. If rolled over to another retirement account like a traditional IRA you would owe no tax. Otherwise you will be taxed on the distribution and pay a 10% early withdrawal penalty. 

[Opus 17]

You are eligible to roll over the money into a new IRA within 60 days.  You can open a simple IRA at many banks and brokerages. If you do not roll the money over, then it becomes fully taxable, including a 10% penalty for early withdrawal.  You don’t get a  break on the penalty even if the employer discontinued your participation. 

If you do a rollover, you have to roll over the entire amount, including the amount that was withheld for taxes. For example, if the 401(k) balance was $1000, the employer would’ve been required to withhold 20% or $200, and send you a check for $800. To complete the rollover, you would have to send $1000 to the new IRA. You would get the withholding back as part of your tax refund when you file your tax return.  Be sure to tell the new IRA that this is a rollover and not a contribution.

[dmertz · Accepted solution]

There is no requirement that if you do a rollover the entire amount must be rolled over.  You can roll over as little or as much as you desire within 60 days of the distribution, but if less than the taxable amount is rolled over you'll be subject to income tax and potential early-distribution penalty on the taxable portion that is not rolled over.

As others have said, to roll over the entire distribution you would need to substitute other funds for the portion withheld for taxes.

If it has been more than 60 days since the distribution was made, you are stuck with the tax consequences of no longer being eligible to roll the distribution over.