401k early withdraw...?

Question

If you take an early withdraw from your 401k before fifty-nine and a half, is that considered income when calculating earned income credit?

Answer 1

Yes the 401K is income, but it's NOT currently earned income, so it will NOT increase your EIC.

Answer 2

401k Early Withdrawals

Answer 3

Pub 596 explicitly states that distributions from deferred compensation plans, even if reported on Line 7, are not earned income for purposes of the EIC.

The computation of the EIC for a person who has taken a distribution from a 401k would be:

1. If your total AIG is greater than the EIC cutoff, you get no EIC regardless of the amount of your earned income.
2. Figure the EIC based on earned income.
3. Figure the EIC based on adjusted gross income
4. Take the lower amount.

So, your distribution may disqualify you from EIC, or it may lower your EIC.

Answer 4

Yes and no. It's considered in determining if you are eligible for the EIC (there is an AGI ceiling) but it is not considered in determining what the EIC payment will be since it is not earned income. At least that's my reading of the various pubs on the IRS site.

What is unclear is how the IRS would actually treat it. Tax deferred monies are technically earned income when you receive them. Would they consider that as earned income when you take a distribution (early or otherwise) for the purposes of the EIC is unclear. On the other hand, there is a divided and interest limitation of $2,900 that will disqualify you from the EIC if you exceed it. Distributions from IRAs or 401(k)s are not on the worksheet for determining the dividend and interest amounts that are used in determining your eligibility for the EIC but I could see how the IRS could treat the portion of a distribution attributable to gain within the tax deffered account as such.

My guess, and how I've filed it in the past without any question so far going back about 6 years, is that if you take out enough to drive your total income above the AGI limit for the EIC you'll lose the EIC but it isn't used to increase (or decrease) your EIC as long as your AGI is below the ceiling. So far, so good.

Answer 5

A 401K withdrawal that you roll over to an IRA, 401K, 403b, etc., within a certain amount of time is not taxable income, at any age.

A 401K withdrawal that you do not roll over is considered income at all ages.

The only significance of your age is that, after a certain age, the withdrawal is not subject to a 10% penalty, but remains income, subject to regular tax. Before that age, both the regular tax and the 10% penalty apply, unless you roll it over to an IRA, 401K, 403b, etc., within a certain amount of time.

Answer 6

yes it is. You can go to irs.gov and get alot of info.