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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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I cashed out my 401k - is that considered investment ...

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I cashed out my 401k - is that considered investment income for tax filing purposes?


In what year did you cash it out?

how old were you?

Did you get a 1099-R?

Customer: replied 9 years ago.
Reply to Ed Johnson's Post: Cashed it out 2007.
I was 36 - cashed out because of new employment and divorce that year.

Is a 1099-R like a W-2 for that money? Yes - I received one of them.

Dear Jody,

Thanks for the information.

This is not going to be treated as an investment income. This is a retirment fund distribution, and sould indicate a code 7 for total distribution on your 1099.

If you did not redeposit it to another 401(k) as a roll over, then you will have to report his as an early distribution.

it will be taxed at your regular marginal rate, and you will have to pay a 10% early distribution penalty.

This get reported on form 1040 and figure the tax on line 59:

calculate the additional tax penalty directly on Form 1040 line 59, you:

  • Look on Form 1099-R from your retirement plan.
  • Find the figure in boxes 1 (Gross Distribution) and 2a (Taxable Amount), and the code in box 7 (Distribution Codes).
  • Multiply the amount in box 2a by 0.10.
  • Report this amount on Form 1040 Line 60.
  • Write "No" on the dotted lines next to line 59 to inform the IRS that you do not need to attach Form 5329.

Or use form 5329


Customer: replied 9 years ago.
I cashed out a total of $13, 789.14 and they kept $2,355.62 for federal income tax witheld. Does that mean I will have to pay in $1400 on my taxes?


If they did not take the penalty or enough at your markigal rate, then yes. Most plan adminstrators take 35% (25% as supplemental income withholding and 10% for a penalty). However other comanies leave you responsible for the penalty when you take an early distribution when you change jobs becuase you may roll it over and not have to pay the penalty. This may be what your employe did, so they just withheld at your regular marginal rate at the time.

Customer: replied 9 years ago.
Reply to Ed Johnson's Post: So, if I am a single (divorced in March of 2007)mother with one child to claim and my income was $24556.64 + the $13,789 from my 401k cashed out. If I have to pay a $1400 penalty for cashing that out, does that mean I am going to owe alot of money when my taxes are done?


This depends on your total situation. you may have some coming back.

Here is a quick test. Callit an acid fast test.

Your filing status is most likely head of household.

You have as total income: 38,346

minus 7550 single head of houshold deduction

minus 6800 exemptions

adjusted gross income: 23,996

The actual tax on this should be: 3383. This inclueds a child tax credit of 1,000 and the 10% penalty.

If you credit the amount that was taken by the plan administrator alreay, you need to pay in 1,027 more dollars. If your employer took that much or more from your salary you are covered.

Of course you might come up with more deductions, so would still be ok.

Try this calculator and apply all the information that pertains to you.



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