How to File Taxes on a 401(k) Early Withdrawal

by Cynthia Myers, Demand Media
    Report 401(k) withdrawals on form 1040.

    Report 401(k) withdrawals on form 1040.

    The laws that established 401(k) retirement accounts sought to preserve the funds in those accounts for retirement. You can withdraw money from your account without penalty once you reach age 59 ½, but in most cases, if you make an early withdrawal, you owe a tax penalty. And since you don’t pay taxes on the money you contribute to your 401(k) at the time you make the contribution, you must pay taxes on the funds when you withdraw them, whether it’s an early withdrawal or not.

    1099

    When you withdraw money from your 401(k), at the end of the year in which you make the withdrawal, you’ll receive a form 1099-R from the financial institution that administers the account. Box 2A of the 1099-R shows the amount of distributions you received from the 401(k). Use this amount to complete the forms you’ll need to file your taxes.

    Penalty

    The tax penalty for withdrawing money from your 401(k) before you reach age 59 ½ is 10 percent of the amount you withdraw, in addition to any regular income taxes you owe on the money you withdraw. To report the withdrawal and pay the tax penalty, you’ll need Form 5329, Additional Taxes on Qualified Plans. Report the total amount of your early withdrawal on line 1 of the form. On line 2, deduct any withdrawals that aren’t subject to the tax penalty, such as qualifying hardship withdrawals. Multiply the total on line 3 by 10 percent to figure the tax penalty you owe. Include this amount on line 58 of your form 1040.

    Income Tax

    You’ll also owe regular income tax on your 401(k) withdrawals, whether they are subject to the penalty or not. You report the amount of the withdrawals on line 16A of your 1040, under Pensions and Annuities. The money you withdraw from your 401(k) is treated as ordinary income, and added with other income for the year to determine your Adjusted Gross Income. The extra 10-percent penalty for early withdrawals is added as an additional tax, after you figure the tax you owe on your Adjusted Gross Income (AGI).

    Exceptions

    If you withdraw money from your 401(k) for hardship reasons -- to pay for education or for medical expenses, to buy a first home or to save your home from foreclosure -- you won’t owe the extra 10-percent tax penalty on the withdrawal, but you will owe regular income tax on the amount you withdraw. Include the amount of the withdrawal in your income for the year, as described above. If you’re unsure if your withdrawal counts as a hardship withdrawal, consult a tax professional.

    About the Author

    Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.

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