401K penalty withdrawal at 30%

[brujubee]

I took out a disbursement of $2881 from my 401K and they removed 20% ie $576 (because of their business practices) which should have covered my 10% withdrawal and 10% penalty fees. However, when I enter these numbers into Turbotax it says I owe a further 10% or $288. It significantly lowers my return amount. Why is it charging the extra 10%? Is there a glitch in the software or did some genius in Washington decide it was a good idea to charge you 30% now?

[DawnC · Accepted solution]

The 20% is the mandatory amount of withholding but you can request more to be withheld.  The 20% is withholding, not the tax, which can be more or less depending on your tax bracket and other income.

The distribution is taxed as ordinary income taxed at whatever your marginal tax rate is and the early withdrawal penalty is calculated separately.  

General Tax Bracket Info for 2019 - For the tax year 2019, the top rate is 37 percent for individual single taxpayers with incomes greater than $510,300 ($612,350 for married couples filing jointly). The other rates are:
 

• 35 percent, for incomes over $204,100 ($408,200 for married couples filing jointly);
• 32 percent for incomes over $160,725 ($321,450 for married couples filing jointly);
• 24 percent for incomes over $84,200 ($168,400 for married couples filing jointly);
• 22 percent for incomes over $39,475 ($78,950 for married couples filing jointly);
• 12 percent for incomes over $9,700 ($19,400 for married couples filing jointly).
• The lowest rate is 10 percent for incomes of single individuals with incomes of $9,700 or less ($19,400 for married couples filing jointly).

Your tax bracket is only one factor in determining marginal tax rate.  Other things such as tax credits and the taxability of Social Security income can be affected by AGI that will also have an impact on the marginal tax rate.

[brujubee]

Thanks for the reply. I'm still a bit confused by it considering my wife made less than 40,000 and I didn't work last year due to some serious leg and back issues. Odd that it come out to exactly 30%, but I'll have to trust its accurate. Kind of disheartening to watch your refund amount go down, though. 🙂 Thanks again for your help.

[RJbraves]

I withdrew from my ESOP plan and the company I am with held out 30% and the system is pulling an additional 10%.  So now, I am paying 40% when I was told that they were withholding the correct amount.  Is there a way that I can get the 10% added back to my refund?  Is there something else that I can do?  40% is very excessive and I am not even close to making the top amount as a single filer.

[JohnW222]

You're not actually being taxed with an additional 10% penalty.

The withholding on the tax form your company sent reflects the normal withholding for the IRA distribution income, plus the additional 10% withholding for the penalty.

What you're doing on your tax return by inputting this form is reporting the income -- that is, the distribution, itself -- the 10% penalty, and the withholding shown on the 1099.

This is confusing to many taxpayers, because there are actually two tax assessments on this income -- the income tax on the distribution, and the penalty.

But the additional withholding is also being entered.