After putting away money in your 401k plan, you may need to access it to pay for your expenses, either in retirement or beforehand. You can only take a distribution after you are 59 1/2 years old, leave your job, suffer a financial hardship or a permanent disability. Getting the money out of your 401k plan is only half the battle: the IRS requires you to properly report it when you file your income tax return. If you take a distribution before age 59 1/2, the IRS penalizes you by charging an extra 10 percent early withdrawal penalty.
1. Request a distribution from your 401k plan. Typically, this requires you fill out a distribution request form stating your account information and how you want the money paid to you. After the end of the year, your 401k plan mails you a Form 1099-R that shows the amount of the distribution and the amount withheld for federal income taxes.
2. File Form 5329 if you are not 59 1/2 years old at the time of your distribution. When completing the form, if you qualify for an early withdrawal penalty waiver, report the amount of the waiver and the waiver code, found in the instructions for Form 5329, on line 2. For example, if you took out $15,000 as part of a qualified domestic relations order, report "15,000" on line 2 and "06" next to line 2 to indicate the reason for the waiver. If your waiver equals or exceeds the value of your distribution, you owe no penalty. If not, you owe a 10 percent penalty on the amount of the distribution exceeding your waiver.
3. Report your 401k plan distribution on Form 1040 if you owe an early withdrawal penalty. If not, you can use either Form 1040 or Form 1040A. To include the 401k distribution as part of your taxable income, enter the amount as a taxable pension and annuity distribution on line 16b of Form 1040 or line 12b of Form 1040A.
4. Enter your early withdrawal penalty, if any, on line 58 of your Form 1040 tax return.
5. Report the amount of federal taxes withheld from your 401k plan distribution, on line 61 of your Form 1040 tax return. If you use Form 1040A, report the withholding on line 38. This amount lowers your income taxes due or, if you have had too much withheld, will be refunded to you.
- If you are not yet 59 1/2 years old and think you will be able to repay the money, consider a 401k plan loan instead of an early distribution if your plan allows loans, so that you can avoid the early withdrawal penalty.
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