1099R

[debbie2004]

We took a hardship withdraw from the 401K.  we were told there should be no penalties.  We took out just over $300,000.00 and had federal taken out.  We took the money to purchase land to build our primary residence.  Now when I put the info from the 1099R it showed we owed $80,000 in federal taxes now.  We can not pay that.  I must have entered something wrong.  Freaking out over here!  

[DoninGA]

The IRS does not recognize hardship withdrawals as an exception to the 10% early distribution penalty.

The taxable amount of the withdrawal is entered on your tax return as ordinary income and taxed at your current tax rate.  Any federal taxes withheld are entered on your tax return as a tax payment.

The 10% early distribution penalty is entered on your tax return as a tax liability.

If your total tax liabilities are greater than your total tax payments you will have taxes owed.

Go to this IRS website for an online payment agreement application - https://www.irs.gov/payments/online-payment-agreement-application

[Opus 17]

You always pay regular income tax on withdrawals from a pre-tax 401(k).  If you are under age 59-1/2, you  also pay a 10% penalty for early withdrawal.  There are several exceptions to the early withdrawal penalty, but building a home is not one of them. 

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

 Even with an exception, you still owe regular income tax, and the size of the withdrawal puts you in the 32% tax bracket at least, not counting state taxes of 5%-13% depending on your state.  Your overall tax exposure could be as much as 59%. 

If there was backup withholding at the time of the withdrawal (usually 20% is mandatory) that would be reported on your 1099-R and Turbotax will apply that to the balance due, but you likely owe substantial additional tax. 

You can request a payment plan from the IRS.  You may want to consult a tax professional (enrolled agent) about your tax debt.

https://www.irs.gov/payments/payment-plans-installment-agreements

[DianeW777]

There may have been a misunderstanding about what your tax situation might be when you decided to take this distribution from your 401k.

• Retirement Topics-Plan Loans

What is a 401(k) loan? (This postpones any income and penalty if plan terms allow and are met)

A 401(k) loan allows an account holder to borrow against their savings held within the account. Loans of this type don't trigger the 10% early withdrawal penalty that occur when money is permanently taken out of a 401(k). There are limits to the repayment terms and amount that can be borrowed - generally a 401(k) loan must be repaid within five years (though longer terms can be available if used for a principal residence) and the amount of the loan is limited to half of the account balance or $50,000, whichever is less.

What is a 401(k) withdrawal?

As the term implies a 401(k) withdrawal is simply pulling money out of a 401(k) account, which can be done at any time - up to the limit of the account balance. There is a significant cost to withdrawing funds from a 401(k) before the age of 59 1/2, however, as the IRS imposes an early withdrawal penalty of 10%. Early withdrawals from these qualified retirement accounts is not recommended, unless needed as a last resort. Even then, there are alternatives such as hardship withdrawal provisions that can shield account holders from tax penalties if they meet certain conditions and are then simply taxed as regular income.

As indicated by our Tax Champ @DoninGA a payment agreement can be a consideration.

[SweetieJean]

Unfortunately, there is a difference between allowed Hardship Withdrawals under the terms retirement plans, and those of the IRS.  While yours may qualify for the former, it does not necessarily do so for the IRS.