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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 1060
Experience:  Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
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I got an early all withdrawal from my 401K plan in PA. I would

Resolved Question:

I got an early all withdrawal from my 401K plan in PA. I would like to determine the taxable portion. Early withdrawals are taxed based on the cost recovery method. The cost recovery method is a way to determine how much of a distribution from a retirement plan or annuity is taxable. Under the cost recovery method, an individual "recovers" all of his or her contributions to a retirement plan, before reporting any PA taxable income. (https://revenue-pa.custhelp.com/app/answers/detail/a_id/1469) *** In my case, my 401k contribution : 3000.00, company match: 3000.00, Gross distribution: 8000.00 1) Is company matched amount taxable or not? 2) Based on the recovery method, how much is taxable? thanks
Submitted: 1 year ago.
Category: Tax
Expert:  Barbara replied 1 year ago.

bkb1956 :

Thank you for allowing me to be of service to you regarding your tax question. Employer contributions are the matching portion of the pre-tax payroll deductions, so your entire withdrawal would be taxable. Give me a moment to review the reference you cited.

bkb1956 :

Per the Pennsylvania Department of Revenue, early withdrawals are taxed based on the cost recovery method. The cost recovery method is a way to determine how much of a distribution from a retirement plan or annuity is taxable. Under the cost recovery method, an individual "recovers" all of his or her contributions to a retirement plan, before reporting any PA taxable income.

For example, if you contributed $200 a month for 80 months to a qualifying pension plan, you contributed $16,000 to the plan. If you took a lump sum distribution of $20,000 before you were qualified to retire, only $4,000 would be taxable. Based on the cost recovery method, the first $16,000 of the distribution was your own money, leaving only $4,000 as taxable.

bkb1956 :

Therefore, since you contributed $3000 yourself, the taxable amount would be $5000 ($8000 distribution less your $3000 contribution).

bkb1956 :

Please let me know if you need further information or clarification. Thank you.

Customer:

thank you for your replay, so is company matched amount taxable? right? thanks

bkb1956 :

You are correct. The company matched contributions are pre-tax payroll deductions.

Customer:

would you confirm recovery method in PA? In PA state level, 401k contribution is not pre tax deduction. My understading is that only earnings is taxed on pa state level since my contribtion and company matched are not pre tax deduction on state level. thanks

bkb1956 :

I sent you the guidelines from the Pennsylvania Department of Revenue in my earlier response. Here is the example again: For example, if you contributed $200 a month for 80 months to a qualifying pension plan, you contributed $16,000 to the plan. If you took a lump sum distribution of $20,000 before you were qualified to retire, only $4,000 would be taxable. Based on the cost recovery method, the first $16,000 of the distribution was your own money, leaving only $4,000 as taxable. Only your contributions are "recoverable."

Customer:

okay thanks

Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 1060
Experience: Tax Preparer for 16 years; 25+ years experience as a real estate/corporate paralegal.
Barbara and 6 other Tax Specialists are ready to help you
Expert:  Barbara replied 1 year ago.
It's been my pleasure. If you have any questions in the future, please put "for bkb1956" in the subject line, and I will be happy to assist you. Best regards.

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