Early 401K withdrawl?

Question

I was Laid Off and I cashed out my 401K for the full amount.I had all taxes withheld to prevent from having to pay taxes when I file.Does anyone know if there are any other fees or charges I will have when I file? Is there a special form for people who withdrawn due to job loss or layoff?

Answer 1

Having taxes withheld does not eliminate the fact that you will have to claim the event on your 2006 tax return. You will receive a form 1099R in the mail that will show you how much was withdrawn (box 1) and how much was withheld and given to the IRS (box 4). The amount withdrawn will be taxable income to you just like any other wages you earned. As if that wasn't enough, you will owe an additional penalty of 10% of whatever was withdrawn. The only good news is the amount withheld will go as a credit towards your tax liability just like any amount normally withheld from a paycheck (box 2 of your W-2). Your tax preparer or software will ask you if you received any 1099s. Give the information as shown. Under no circumstances (other than rolling over the money into an IRA or other qualified retirement plan) will you avoid having to claim the amount withdrawn as income. There are a few provisions to avoid the 10% penalty, but unless you died or became disabled or were over 59 1/2, you won't qualify. Unfortunately, the IRS doesn't consider being out of work as a hardship.....go figure.

Answer 2

tax man gave almost a perfect answer....give him top honors for this one. You took a distribution and it's taxable to you. When you get your 1099-R you will put the total amount distributed on line 16a. The taxable portion goes on line 16b. Unless some of the distribution was considered AFTER-TAX going in or you rolled over all or a portion of it then the amounts are likely the same. Your witholding is combined with the Federal Tax Withholding from your jobs/W-2's and goes on line 64.

The only thing left is the 10% excise tax (it's not a penalty, just an extra tax that you can't use deductions to offset. IRS can waive penalties...but they can't waive taxes - small details but facts nonetheless). As taxman said, unfortunately you can't use a job loss/layoff/hardship as a reason to get out of the 10% tax. You don't say what your age is though...The tax is automatically waived if you are over age 59 1/2...but a little known fact is that it's also waived if you are over age 55 when you seperate from service from your employer (either quit, layoff, fired, retired or whatever). So, if you were over age 55 when you got laid off then you're ok. Otherwise you're likely obligated. The tax goes on line 60 and you're done.

Likely you had 20% withheld from your taxes...so if this distribution took place this year (2007) you can raise your withholding on new job to account for the extra tax. If the distribution took place in 2006? Then you might be hosed. Hope you had enough withheld from your regular pay.

Answer 3

In addition to being taxable as a pension distribution which is taxed at your marginal rate, you will also be subject to a 10% penalty. The only way to avoid the penalty (and the tax) is to do a rollover of the entire gross amount into an IRA. If you had withholding, you will receive a net amount (net of withholding), so to rollover and avoid the taxes, you would need to put in extra money to cover the withholding.

There is no special circumstance, such as job loss or layoff, that would exempt you from the tax and the penalty.

Answer 4

There will not be any additional fees, but there is a chance you may get back some of the taxes paid depending on how much was earned during the tax year. I did not use a special form.

Answer 5

Two weeks probably.