Hello and thank you for using Just Answer. If you withdrawal $30,000 from your 401K and you are not 55 year old or older and separated from your employer a penalty in the amount of $3,000 (10%) will be due on the $30,000 you withdrawal when you file you income tax return. You must also report the $30,000 as income on your tax return.
Any tax breaks you receive from investing in your new business can only reduce the $30,000 you must report on your tax return. The 10% penalty cannot be reduce by any credits.
Follow up question:
Will the deduction claimed on the $30K business investment approximate or exceed the $3K penalty? I don't expect exact numbers...your best guess based on experience?
Thank you.
No, any business credits and business's deductions can only reduce your taxable income not the penalty.
Example: You withdrawal $30,000 from your 401K and you have other income in the amount of $50,000 for a total of $80,000 of taxable income. In 2009 you start your business and have expenses in the amount of $80,000. You can deduct the $80,000 expenses from your taxable income but you still must pay the $3,000 penalty
Enrolled Agent
10 years self employed , Income Tax Preparation & Representation