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May 12, 2011
401k Early Withdrawal Tax Exclusion
by: Stephanie

When you cash out a 401K early, (before retirement age), it is typically taxed as a lump sum distribution using form 4972 to determine the ordinary income part of the taxable distribution.

In addition to this you may be assessed a 10% additional tax for the early distribution. It is this additional tax that you may be exempt from having to pay. You can use Form 5329 - Additional Taxes on Qualified Plans and Other Favored Accounts, to report any amount that should be excluded.

The qualified exclusions and exception codes for Additional Tax on Early Distributions are:

01 Qualified retirement plan distributions (does not apply to IRAs) if you separated from service in or after the year you reach age 55 (age 50 for qualified public safety employees).

02 Distributions made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from an employer plan, payments must begin after separation from service).

03 Distributions due to total and permanent disability.

04 Distributions due to death (does not apply to modified endowment contracts).

05 Qualified retirement plan distributions up to (1) the amount you paid for unreimbursed medical expenses during the year minus (2) 7.5% of your adjusted gross income for the year.

06 Qualified retirement plan distributions made to an alternate payee under a qualified domestic relations order (does not apply to IRAs).

07 IRA distributions made to unemployed individuals for health insurance premiums.

08 IRA distributions made for higher education expenses.

09 IRA distributions made for purchase of a first home, up to $10,000.

10 Distributions due to an IRS levy on the qualified retirement plan.

11 Qualified distributions to reservists while serving on active duty for at least 180 days.

12 Other (see below). Also, enter this code if more than one exception applies.

It sounds like you may qualify for exception code 09. You can get any taxes due back to you by filing an amended 2010 tax return using federal form 1040X.

For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income.

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