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Wondering— if I took out money from a 401k as cash, does the…

Hi! Wondering— if I...
Hi! Wondering— if I took out money from a 401k as cash, does the tax come out of the withdrawal or do I have to pay it in a he next tax season?
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Customer reply replied 1 month ago
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Answered in 5 minutes by:
3/8/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,692
Experience: Taxes, Immigration, Labor Relations
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You will prepare your tax return - and on the tax return - you will calculate your tax liability based on TOTAL income, filing status, deductions, etc.

THEN -

the amount withheld from your 401k distribution and the amount withheld from your wages - these will be credited toward your tax liability.

As a result - if withholding is less - you will have some additional tax due,

but if withholding is larger than your actual tax liability - you will claim a refund.

Let me know if you need any clarification or help with estimations.

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Customer reply replied 1 month ago
I think I’m more asking: Do I have to pay penalty tax on the 401k cash withdrawal at the time of withdrawal or at tax time?

The penalty is determined on your tax return - and added to your total tax liability.

If you are below 59 1/2 - you might be subject to penalty.

But there are several exemption - and it might be worth to verify if any may be used in your situation.

The purpose of withholding is - to cover your possible tax liability (and penalty) - but neither your tax liability nor the penalty are not determined by the administrator of your account and not when the payment is issued.

Withholding is normally 20% - and that may be more or less than your actual tax liability.

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Customer reply replied 1 month ago
if I understand correctly— I would’ve chosen when I withdrew to either withhold or not. I don’t remember that but it makes sense if that’s the case.

Yes - in general - you may file a special withholding form and ask not to withhold.

Here is the form which is used in your situation.

https://www.irs.gov/pub/irs-pdf/fw4p.pdf

it is very similar to one you file with your employer.

But overall that makes no difference as depending on your total tax liability - you are getting full refund for that withheld amount.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,692
Experience: Taxes, Immigration, Labor Relations
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