How to File Taxes With 401(k) Distributions

how do i file my taxes early

You must include 401(k) distributions on your tax return.

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Reaching retirement and replacing your paychecks with 401(k) plan distributions can be a breath of fresh air after decades of work. But your tax liabilities don't disappear. Distributions after you reach age 59 1/2 are considered "qualified distributions," which means you can take the money out for any reason and not pay an early withdrawal penalty, although you still must pay income taxes at the regular rate on any money you withdraw. Early distributions usually incur a 10 percent early withdrawal penalty in addition to regular income taxes, but exceptions may apply.

Step 1

File your taxes with Form 1040 or Form 1040A if you are taking a qualified distribution. If you are taking an early distribution, you have to use Form 1040 and attach Form 5329.

Step 2

Report the amount of the 401(k) plan distribution on line 16b of Form 1040 or line 12b of Form 1040A. Even if you qualify for an exception from the early distribution penalty, the income is fully taxable. The amount of the distribution is found in box No. 1 of your Form 1099-R.

Step 3

Complete Form 5329 if you were not at least 59 1/2 years old

on the date you took the distribution. This form either calculates your early withdrawal penalty or documents the reason for your exception. If you have a reason for an exception, write the code that corresponds to it next to line 2 and the amount on line 2. These codes are found on page 3 of the Form 5329 instructions. For example, if you retired after turning 55 years old and then took a distribution, enter "01" next to line 2. You may also be able to avoid the additional 10 percent tax if you took money from your 401(k) to cover substantially equal periodic lifetime payments; because of a total and permanent disability; to cover unreimbursed medical expenses that exceeded 7.5 percent of your income; to cover payments required by a divorce decree; to cover health insurance premiums if you were unemployed; or to remove contributions that exceeded your annual limit.

Enter the amount of the penalty from line 4 of your Form 5329, if any, on line 58 of your Form 1040 tax return. This amount adds to your taxes due for the year.

Enter the amount of income taxes withheld, found in box 4 of the Form 1099-R, on line 62 of Form 1040 or line 36 of Form 1040A. This amount decreases the taxes you owe for the year.

Source: finance.zacks.com

Category: Taxes

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