TurboTax gives me a savers credit for a 401k distribution

[mikemann101]

I had a 401(k) distribution from a former employer and input the 1099-R in TurboTax.  TurboTax automatically input the amount in the Savers Credit calculation where it says to enter any 401(k) distribution.  Then it calculated a Savers Credit for me.  I do not understand- I get a penalty for taking the withdrawal since I am too young to take it, but then I get an ever bigger Savers Credit.  Does TurboTax have a bug that is trying to give me this credit, or is the government trying to incentivize people to take money out of their 401(k)?

[xmasbaby0]

You entered the 1099R in the wrong place.  Delete it from the saver credit.

To enter your retirement income, Go to  Federal> Wages and Income>Retirement Plans and Social Security>IRA  401 k) Pension Plan Withdrawals to enter your 1099R.

[DoninGA]

When you entered the Form 1099-R, if you were under the age to be exempt from the 10% early withdrawal penalty then the penalty will be assessed on the federal tax return as a tax liability.

The Saver's Credit is based on your adjusted gross income and your filing status for eligibility. 

If you are eligible then the contributions you made to a tax deferred retirement plan, such as a 401(k), your contributions would be reported on your W-2 in box 12 with a code of D for a 401(k) and used for the credit.

[ThomasM125 · Accepted solution]

You have to contribute to a retirement plan to qualify for a savers credit, but if you take a distribution from your retirement plan it will reduce the amount of your contribution that is used for the savers credit calculation. You will see the distribution and the contribution on Form 8880, so that may where you are seeing the distribution. So it may be you contributed enough to your retirement plan to qualify for a credit, even though you took a distribution.

[mikemann101]

Thanks ThomasM125 -

That explains it, now I see how it is being done.  Form 8880 starts with my total 401k contributions and reduces it by the amount that was distributed to me- so it actually reduces my potential credit.  That makes sense now!