How to Calculate Taxes & Penalties for Withdrawing a 401(k)

by Mark Kennan

When you take out money from your 401(k) plan, the Internal Revenue Service wants to know about it on your income taxes. Before you raid your 401(k) plan, you need to consider the tax consequences. All 401(k) plan distributions are subject to income taxes, and nonqualified distributions are also subject to the early-withdrawal penalty. If you are under 59 1/2, the IRS considers you to have taken a nonqualified distribution, subjecting your 401(k) plan withdrawal to the 10 percent early-withdrawal tax penalty.

Subtract the value of any exemption from the early-distribution penalty you qualify for from the total distribution if you are under 59 1/2 years old. If you are 59 1/2 or older, you owe no early-withdrawal penalty. If you have no exemption, your entire nonqualified distribution is subject to the penalty. Examples of exemptions include medical expenses above 7.5 percent of your adjusted gross income or if you are permanently disabled. For example, if you took a nonqualified distribution of $20,000 but you had $4,900 of medical expenses that exceeded 7.5 percent of your adjusted gross income, only $15,100 of your distribution is subject to the early-withdrawal penalty.

Multiply the portion of your distribution by 10 percent to figure your early-withdrawal penalty for withdrawing money from your 401k plan before age 59 1/2. In this example, multiply $15,100 by 10 percent to calculate your early withdrawal-penalty of $1,510.

Use the tax -ate schedules in IRS Publication 17 to find your income-tax bracket. If your 401(k) plan distribution pushed you into a higher bracket, find the tax rate for each part of your distribution. For this example, if you are in the 26 percent tax bracket but only $6,000 under the 29 percent tax bracket before your $20,000 distribution, $6,000 would be taxed at 26 percent and $14,000 would be taxed at 29 percent.

Multiply your distribution by the tax rate or tax rates it falls under to calculate your income tax on the distribution. In this example, multiply $6,000 by 0.26 to get $1,560 and $14,000 by 0.29 to get $4,060, for a total income tax of $5,620.

Warning

  • Losing your job or suffering another financial hardship not listed in the IRS Publication 5329 Instructions does not qualify you for an exemption from the early-withdrawal penalty.

Items you will need

  • IRS Publication 17

Photo Credits

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