after tax 401K distribution
Does the 59 1/2 age requirement apply when taking the after tax portion of a 401K as a cash distribution after a direct rollover of the pretax dollars? In other words, if you retire early and take the cash directly without creating a separate after tax IRA, do you pay the 10% penalty for early withdrawal?
Permalink Submitted by Alan Spross on Sat, 2008-11-22 20:13
No. Early withdrawal penalties do not apply to after tax distributions.
You will get a 1099R, but it will show -0- for the taxable amount, and even though it will show an early distribution code in Box 7, there is no taxable amount to penalize.
Permalink Submitted by Shannon Davis on Sat, 2008-11-22 20:40
Thanks Alan. the 1099R correctly shows 0 as the taxable amt but was coded “1” & is causing all sorts of problems with the final tax return. Is there a specific publication/tax rule that I can look up to justify not paying the penalty?
Permalink Submitted by Alan Spross on Sat, 2008-11-22 23:25
The following is copied from the Tax Code Sec 72(t):
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(t) 10-percent additional tax on early distributions from qualified
retirement plans
(1) Imposition of additional tax
If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
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The amount included in your gross income is -0-. If you are using tax software program be sure to enter the amount in Box 2a as the taxable amount, not the amount in Box 1. Do not confuse the amount in Box 1 with your gross income for tax purposes, which is easy to do.