topic Retirement Plan Withdrawal Penalties in Retirement tax questions

Retirement Plan Withdrawal Penalties

pamekaye — Tue, 10 Mar 2026 07:04:37 GMT

I withdrew my 401(k) funds and plan to invest in real estate instead. Is there a way to offset the penalties with some kind of tax deduction? Also, does TurboTax calculate the penalty when we prepare our taxes? I had the taxes taken out of the proceeds. I just don’t know where the penalty is seen.

Re: Retirement Plan Withdrawal Penalties

VolvoGirl — Wed, 16 Nov 2022 16:37:27 GMT

Turbo Tax will automatically calculate any penalties on it based on your age and the code in box 7 on the 1099R. If you took it out early before 59 1/2 there is a 10% Early Withdrawal Penalty. For 2021 the penalty will be on Schedule 2 line 8 which goes to 1040 line 23.

There are a few exceptions which will be covered when you fill out your tax return.

Exceptions for Early Distributions from a Qualified Retirement Plan such as a 401(k) or 403(b) plan. See Pub 575 page 36 Additional Exceptions
https://www.irs.gov/pub/irs-pdf/p575.pdf

..Distributions upon the death or disability of the plan participant.
..You were age 55 or over in the year you retired or left your job. (50 for qualified public safety employees)
..You received the distribution as part of "substantially equal payments" over your lifetime.
..You paid for medical expenses exceeding 7.5% of your adjusted gross income.
..The distributions were required by a divorce decree or separation agreement ("qualified domestic relations court order"),

The questions about exceptions to the penalty do not come after entering the 1099-R. Rather, you will see that area after you have finished all the Deductions and Credits section.

Re: Retirement Plan Withdrawal Penalties

DoninGA — Wed, 16 Nov 2022 16:39:56 GMT

There is no exemption for the 10% early distribution penalty from a 401(k) for purchase of real estate property.

The early distribution penalty will be calculated by the TurboTax program and entered on the federal tax return as a tax liability on Schedule 2 Line 8. The total from Schedule 2 Part II Line 21 flows to Form 1040 Line 23.

Re: Retirement Plan Withdrawal Penalties

NCperson — Wed, 16 Nov 2022 20:53:48 GMT

@pamekaye - the penalty is trigged by the distribution code in Box 7 of Form 1099-R and your age..... it's rather simple.

Re: Retirement Plan Withdrawal Penalties

Critter-3 — Wed, 16 Nov 2022 21:01:04 GMT

Educate yourself on the pros and cons but you could roll the 401K into a SELF DIRECTED IRA and let the IRA buy the property. You don't pay any taxes or penalties now BUT the IRA must not only own the property but it must pay for ALL the expenses for the property ( RE taxes, insurance, repairs, improvements, etc.).