You can only cash out money from your 401k plan when you leave your company, suffer a permanent disability, have a severe financial hardship or turn 59 1/2 years old. When you cash out money from your 401k plan, you have to pay income taxes because you did not have to include the money as part of your taxable income in the year you made the contribution. In addition, the Internal Revenue Service (IRS) also charges a 10 percent early withdrawal penalty to deter people from cashing out their 401k plans before retirement.
Complete Form 5329 if you were under 59 1/2 years old at the time you cashed out your 401k plan. If you are not at least 59 1/2 years old, your distribution is not qualified and you owe the 10 percent early withdrawal penalty. Only if an exception applies can you avoid the penalty. Exceptions include retiring after age 55 (50 for qualified public safety employees), money taken out for an IRS levy on the 401k plan and distributions made under a qualified domestic relations order. If you owe a penalty, use Form 1040 to file your taxes.
Enter the total amount of your 401k cash out on line 16b of Form 1040 or line 12b of Form 1040A. If you do not remember how much you took out, check your Form 1099-R.
Add the federal income taxes withheld from your 401k cash-out, found in box 4 of Form 1099-R, to your other federal income tax withholding and report the total on line 61 of Form 1040 or line 38 of Form 1040A.
Report the early withdrawal penalty, if any, on line 58 of Form 1040.
Attach your Form 1099-R when you submit your income tax return.
- Unless you desperately need the money, consider rolling over your 401k plan cash-out proceeds to a traditional IRA, especially if you are under 59 1/2. By doing so, you avoid paying the 10 percent early withdrawal penalty and can continue to let the money grow in a tax-sheltered account.
Items you will need
- IRS Form 1040 or Form 1040A
- IRS Form 5329