401k penalty - The Finance Forums: Financial planning, debt help, loans, mortgages, retirement and 401k, investment, and general finance discussion forums

topler · #1 (**permalink**) 04-17-2008, 03:24 PM

I'm 27 and because of a family emergency I need to draw on my 401k. I am aware of the penalties and taxes. My question is are the taxes paid when I cash the money in or do I pay next year when I claim the money as income on my 2008 tax statement? Do I need to save a portion to prepare to pay that back to the IRS?

Thanks for the advice,

cja

AllThingsPersonalFinance · #2 (**permalink**) 04-18-2008, 01:34 AM

Quote:

Originally Posted by topler

I'm 27 and because of a family emergency I need to draw on my 401k. I am aware of the penalties and taxes. My question is are the taxes paid when I cash the money in or do I pay next year when I claim the money as income on my 2008 tax statement? Do I need to save a portion to prepare to pay that back to the IRS?

Thanks for the advice,

cja

Here is what I found for you:

You figure the additional tax either directly on Form 1040 line 59, or on Form 5329 (PDF) and Instructions for Form 5329 (PDF). You calculate the additional tax penalty directly on Form 5329 if you meet one of the exceptions and the retirement plan did not report the exception on Form 1099-R box 7.

To calculate the additional tax penalty directly on Form 1040 line 59, you:

Look on Form 1099-R from your retirement plan.
Find the figure in boxes 1 (Gross Distribution) and 2a (Taxable Amount), and the code in box 7 (Distribution Codes).
Multiply the amount in box 2a by 0.10.
Report this amount on Form 1040 Line 60.
Write "No" on the dotted lines next to line 59 to inform the IRS that you do not need to attach Form 5329.

It sounds as though you would pay the tax on the 401k withdrawal along with your regular taxes in April.

I hope this helps.

GarySpicuzza · #3 (**permalink**) 04-23-2008, 02:20 PM

Source LINK.

Quote:

You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

You become totally disabled.
You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
You are required by court order to give the money to your divorced spouse, a child, or a dependent.
You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

Employers are not required to offer any type of hardship withdrawal, so you should check with your employer to see if it is available to you.

topler asked:

Quote:

My question is are the taxes paid when I cash the money in or do I pay next year when I claim the money as income on my 2008 tax statement?

If the withdrawal is made in 2008 the tax and penalty would be due April 15th 2009.

Quote:

Do I need to save a portion to prepare to pay that back to the IRS?

That's a personal choice.
You could...

Or......

Just adjust the number of exemptions claimed on your W-4 with your employer. Decrease the number by one (1) so additional tax is withheld throughout the year.

Or, SEE line 6 on form W-4....

Quote:

Additional amount, if any, you want withheld from each paycheck

Click HERE.