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JAIA
Level 1

401k Withdrawal 10% Penalty Tax Withholding Calculation

Due to my employer being bought by different company, I will be rolling over a portion to new employer's 401(k) plan and cashing out a portion. They will withhold 20% federal and 5% state. Then I have to pay the 10% penalty. I'm using the Tax Withholding Estimator on the IRS website to help with what I may owe. In the estimator, I entered the amount of cash ($17,000) I'm getting from my 401(k) as income and it came up with what I will have to pay in 2021 for 2020 taxes if I keep my current withholdings. With the additional $17,000 added to my income, it will move me into the next tax bracket of 22%. Do I add the 10% penalty ($1,700) onto the amount that the IRS calculator shows that I will owe? I need to figure out how much more I need to withhold from my paychecks so that I won't owe as much when it comes to filing taxes in 2021. Thank you in advance for your help! 

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Accepted Solutions
dmertz
Level 15

401k Withdrawal 10% Penalty Tax Withholding Calculation

Yes, you must factor in the $1,700 penalty yourself by adding the $1,700 to the Total tax liability after credits determined by the estimator.  Divide $1,700 by the number of pay periods remaining in the year and add the result to whatever the IRS Tax Estimator determines for the Extra withholding that needs to be shown on line 4(c) of the Form W-4 that you will be submitting.

 

Also make sure that in the Other Source of Income and Payment section of the estimator you have included the $17,000 of income from the 401(k) and the $3,400 of taxes withheld from that payment so that it's included in the estimator's calculation of your AGI, ordinary income tax and tax withholding already paid.

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1 Reply
dmertz
Level 15

401k Withdrawal 10% Penalty Tax Withholding Calculation

Yes, you must factor in the $1,700 penalty yourself by adding the $1,700 to the Total tax liability after credits determined by the estimator.  Divide $1,700 by the number of pay periods remaining in the year and add the result to whatever the IRS Tax Estimator determines for the Extra withholding that needs to be shown on line 4(c) of the Form W-4 that you will be submitting.

 

Also make sure that in the Other Source of Income and Payment section of the estimator you have included the $17,000 of income from the 401(k) and the $3,400 of taxes withheld from that payment so that it's included in the estimator's calculation of your AGI, ordinary income tax and tax withholding already paid.

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