I haven't posted in a few days because, a) I've been slamming at work and B) I've been ruminating over my taxes. This year was little rough because I cashed out my 401K. Yes, I know I had to pay a penalty. Yes, I know I have to pay taxes on it. But I needed the cash.
The big question was: How do you file this on your taxes? This wasn't as easy as I thought it was going to be. Let me re-phrase that, it wasn't as easy to FIND OUT how to pay taxes on your cashed out 401K. Once I found out how.. it was easy. I searched the Internet and was directed to many sites that admonished me for cashing out early, ranted about the 10% penalty, blah, blah, blah. None were very helpful.
Then I called the IRS and asked them. Now, I would never EVER write on my blog that someone at the IRS was rude, condescending, totally unhelpful, and hung up on me. No way. But if that did happen, I would just call the IRS right back before getting a nice friendly IRS person, to answer my question.
So Internet this is my "Happy Tax Day" present to you: I am going to give step, by step instructions on how to file your cashed out 401K , (that's a 401K or 403B that you cashed out before the ripe old age of 59 1/2) on your Federal Tax Return. I hope by doing this I will save a future tax payer endless anguish on trying to find out how this is done. You've come to the right place if you've:
1) cashed out your 401K or 403B before the age of 59 1/2.
2) You just want to pay the penalty and any tax owed on your Federal Tax Return.
3) You are taking the standard deduction. (but these instructions may also work if you are itemizing.)
Step 1. When you cashed out your retirement fund, most likely the institution that held your funds with held 20% for FEDERAL TAX. This works very much like tax being withheld from a regular paycheck. This is not the penalty and most likely, this will not be enough. Around tax time, you will get a 1099 to file with your taxes. On it will indicate the entire amount of your check, and the amount that was deducted for Federal Tax. The taxable amount is the entire amount of the distribution before they took the taxes out.
Step 2. When you file your taxes, you do not need to fill out a separate form, but you will not be able to file a 1040EZ file. Instead you will need the 1040 Long Form. (It's not that scary)
Step 3. When you fill out your form, just put in "wages, salary and tips" on line 7. DO NOT include the amount of your cashed out 401K. That should be entered on line 15A & 15B. Most likely this will be a simple amount. (15A /15B is for IRA 16A/16B is for Pensions and Annuities).
Step 4. Add your wages and tips, with your 401K cash out. - this is your total income.
Step 5. Subtract your deductions to determine your "taxable income". Now figure out your taxes.
And here is the bad news. That is not all the taxes you owe. Remember that 10% penalty? Well you will have to ADD that to your taxes. So say your penalty was $500 and your taxes owed, was $9,500, this would mean that you owe $10,000 in taxes. Which brings us to step 6 -
Step 6. Where do you add the penalty amount? That's on line 58. It is NOT line 30 "penalty on early withdrawal of savings. (I almost made that mistake).
When you add your taxes paid, you will add the amount on your W2's AND that 20% withheld when you cashed out your 401K. Hopefully this total will be greater than the taxes owed plus penalty. That was NOT the case for me this year.
Best of luck.Photo Credit: Shorpy
Disclaimer: I am not an accountant, nor do I play one on TV. Please follow this advice at your own risk.In other words, if you get audited, don't come crying to me.