Stashing away money in a 401(k) plan is a great way to save for your retirement. However, even though it's your money in the account, you're not always allowed to take the money and run whenever you want. If you're over 59 1/2, you're good to go because you can take withdrawals without penalty any time. But, if you're under 59 1/2, the only time you can close out your account is after you've left the company. Unless you qualify for an exception, you'll also owe a 10 percent early withdrawal penalty on top of the income taxes. Even if you can get the money out, the second half of the battle is reporting it on your taxes.
Obtain a distribution request form from your 401(k) plan administrator. Often the plans will make them available online so you can just download a copy and print it out.
Complete the distribution request form and submit it to your 401(k) plan administrator. You'll need to include your name, account number, amount to be withdrawn and how you want to be paid, such as by check or by having the money directly deposited into another account. When you distribute the entire amount, that closes your account. If you're married, your plan might also require your spouse to sign the form.
Report the distribution as a taxable pension and annuity payment on your Form 1040 or 1040A tax return. The payment goes on line 12b of Form 1040A or 16b of Form 1040 and is counted toward your taxable income for the year.
Report the federal income tax withholding, found in box 4 of your Form 1099-R, on your federal income tax return, either line 36 of Form 1040A or line 62 of Form 1040. Your financial institution is required to withhold at least 20 percent of the payout for taxes.
Complete Form 5329 if you're under 59 1/2 when you take the distribution to figure the early withdrawal penalty or report your exception. For 401(k) plans, exceptions include permanent disability, medical expenses exceeding 10 percent of your AGI, and distributions related to a qualified domestic relations order. Otherwise, you'll be shipping an extra 10 percent of the distribution to the IRS.
Items you will need
- Form 1040 or 1040A
- Form 5329
- If you've left your employer, you can roll the money into a traditional IRA to preserve the tax-sheltered growth of the assets and avoid paying the 10 percent early withdrawal penalty. However, any future distributions from the traditional IRA will be hit with income taxes and, if you're under 59 1/2 and don't qualify for an exception, the 10 percent early withdrawal penalty.
- Internal Revenue Service: General Distribution Rules
- Internal Revenue Service: Topic 558 - Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs
- Internal Revenue Service: Retirement Topics - Rollovers of Retirement Plan Distributions
- Internal Revenue Service: Topic 502 -- Medical and Dental Expenses
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