401k withdrawal and gross income

[cspyon]

I understand that any withdrawals from 401k are considered income. I'm curious about its relation to my gross income.  For example, if I withdraw $20,000 from my 401k account, should I simply add it to my gross income when I file taxes next year?  I'm a self-employed contractor receiving 1099-NEC. So I'm curious. 

[DoninGA]

Withdrawals from a 401(k) account are entered on your tax return as ordinary income.  

You will receive a Form 1099-R in January of the year after the withdrawal.  The Form 1099-R is reported on your federal tax return.

[dmertz · Accepted solution]

If you take a distribution from your 401(k) in 2024, you'll receive a 2024 Form 1099-R that you'll need to enter into 2024 TurboTax.  If you have no after-tax funds in the 401(k), the Form 1099-R will show that the entire distribution is taxable and will add to your AGI by being included on Form 1040 line 5b.

(If you do have after-tax funds in the 401(k), the distribution will be a proportionate mix of after-tax funds and taxable pre-tax funds.  Only the taxable amount adds to your AGI.  After-tax funds would generally be those that you explicitly contributed as after-tax funds or resulted from repayment of a defaulted 401(k) loan.)

[cspyon]

For example, If I take $3000 monthly, I receive about $2100 after federal and state tax withholding. So, if I start receiving it from July to Dec. this year,  the total $18,000 (3000 x 6 months) would be added to my AGI when I file the tax returns next year, right? 

[DoninGA]

@cspyon Correct.  The taxable amount of your withdrawal would be $18,000 and entered on your federal tax return Form 1040 Line 5b.

[cspyon]

Despite the federal (20%) and state tax (MD, 7.75%) witholding, should I still add $1,8000 before the tax?

[dmertz · Accepted solution]

Yes.  The amount that you use to pay taxes through withholding is still part of your taxable distribution.  You are taking the entire amount as a taxable distribution and then using some of the resulting cash to pay your taxes.

If you are over age 65 and depending on how much you might be collecting in Social Security benefits, you might be eligible for a Maryland pension exclusion that would reduce the amount of the 401(k) distribution that is subject to Maryland state and local income tax.  Also, to avoid an early-distribution penalty on a distribution from the 401(k) you would generally have to receive the distribution after reaching age 59½.

[VolvoGirl · Accepted solution]

The way it works is......

You don't actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You have taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b. The withholding will show up on 1040 line 25b.

It has to break out and show the 10% penalty separately on your return (schedule 2 line 8 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.