topic Taxes on early distribution on 401k in Retirement tax questions

Taxes on early distribution on 401k

Fallout Boy — Fri, 02 Apr 2021 19:22:24 GMT

My wife took out part of her 401 to pay off her loans. She paid federal taxes of 10% on the early distribution. Why does Turbo Tax say we need to pay more taxes.

She took 50,000 and paid 5,000 in taxes. Why does it state we have to pay an additional 5,000.

Re: Taxes on early distribution on 401k

macuser_22 — Fri, 02 Apr 2021 19:32:24 GMT

@Fallout Boy wrote:

My wife took out part of her 401 to pay off her loans. She paid federal taxes of 10% on the early distribution. Why does Turbo Tax say we need to pay more taxes.

She took 50,000 and paid 5,000 in taxes. Why does it state we have to pay an additional 5,000.

The 10% penalty is in *addition* to the normal tax on income. The mandatory 401(k) withholding is 20% so the additional $5,000 tax indicates that probably you are in the 24% tax bracket and should have had more withheld.

Re: Taxes on early distribution on 401k

RayW7 — Fri, 02 Apr 2021 19:43:19 GMT

Assuming you are not 59 1/2 then a withdrawal would be taxed as ordinary income and in addition you would have a 10% penalty.

Note: If the withdrawal was related to COVID-19 by answering one of the following qualification questions then the 10% penalty would be waved and you could spread the tax over 3 years.

The newly enacted economic stimulus package allows those negatively affected by COVID-19 to borrow up to $100,000 from their 401(k) and IRAs without penalty. It also allows the borrower to pay the taxes on that withdrawal over three years rather than all at once.

If you, your spouse or a dependent has been diagnosed with COVID-19, this "free pass" and "tax extension" applies to you.
It can also apply to those who are facing financial hardship due to the pandemic. If you're in this group and need to make the withdrawal, then you should definitely consider this to be an option.

-follow this link for additional information-

2020 Stimulus: Tax Relief for This Year's Taxes - TurboTax ...

Re: Taxes on early distribution on 401k

SweetieJean — Fri, 02 Apr 2021 21:09:02 GMT

Was the loan she paid off a 401(k) loan, student loan, or some other type?