Your Life

Your Life

Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.

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Valued Pioneer
Posts: 5
Registered: ‎09-07-2017

401k early withdrawal

I got laid off in August of 2016. I recently had a child and have not returned to work yet cause I want to stay home with him while he is little. At the beginning of this year I withdrew a small amount ($5000) from my 401k. They penalized me 10% for early withdrawal and 10% for federal income taxes. My question is this:  if i continue to stay home this year and not have been employed at all in 2017,what will happen at tax time. I live in Ky, not married, 1 child. I usually file head of household. Come income tax time will I get a refund of any amount or will I have to pay in?  Please help cause I am ignorant when it comes to money.

Tax Pro
Posts: 5,539
Registered: ‎02-23-2016

Re: 401k early withdrawal

Hi hcollett,

 

 

Welcome to the H&R Block community.

 

So the good news here is that your income tax liability will depend on the outcome of your overall tax return.  If your adjusted gross income is below $17,400 (based on you filing as a head of household with 1 dependent) then you will not owe any federal income tax.

 

Keep in mind though that you must have provided more than 50% of the upkeep of your household for the entire year to file as head of household.  If someone else is providing for you and your child they may or may not be able to claim both of you depending on the situation.  I only mention this because you were out of work for a good part of 2016 and all of 2017 based on the information you provided.  If someone can claim you than you will have federal income tax liability on everything in excess of $6,300.

 

The early withdrawl penalty is somewhat different.  The only way to get out of paying the early withdrawl penalty is if you qualify for an exception.  The most common exceptions include medical expenses, education expenses, and substantially equal payments.  If you were to were to withdraw the same amount from your account each year for a minimum of five years or each year until you reach age 59 1/2 (whichever comes first) you would be exempt from the penalty and you wouldn't have to pay it.  Also, if you were age 55 or older when you were laid off then you qualify for the separation from service exemption.

 

So there's a lot in play here.  For 2017, because you have no earned income you will not be eligible for the child tax credit or the earned income credit, so you will have no refundable credits to help reduce your tax liability.  Therefore you'll need to qualify for an exemption or you will owe the IRS approximately $500 for the early withdrawl penalty.  If the bank that the account is with already withheld tax though then you're covered, you just won't get the first $500 of your withholding back.  Even if someone else claims you, because you only withdrew $5,000 then, based on the information you provided, your income is below your standard deduction amount and that means that you will not owe any federal income tax, so you'll get anything that withheld in excess of the first $500 back as a refund.  If you were to find a new job and work for the last four months of the year this year then you may earn enough to qualify for the earned income credit and child tax credit which will result in a larger refund for you and your child.

 

If you have any other questions I'll be glad to help.

 

Louis,

Senior Tax Advisor (Tampa, FL)

Valued Pioneer
Posts: 5
Registered: ‎09-07-2017

Re: 401k early withdrawal

Ok, so when I took out the $5000 they actually cut out $6250. So does that mean they already took out everything? Also, I drew unemployment up until the end of February this year. What happens with that?
Valued Pioneer
Posts: 5
Registered: ‎09-07-2017

Re: 401k early withdrawal

Thanks for helping me. They took out 20% when I withdrew it so I shouldn't have to pay anymore right? Also, u drew unemployment up until the end of February this year and I already had them take out taxes. So what will happen with that at tax time?
Highlighted
Tax Pro
Posts: 5,539
Registered: ‎02-23-2016

Re: 401k early withdrawal

Hi hcollett,

 

You're welcome.

 

Yes, I believe you will be just fine.  Since they already took out more than enough for taxes it appears that you should come out with a refund, although the exact amount of the refund will depend on the overall outcome of your tax return.

 

The unemployment income is subject only to the federal income tax, so since that was already taken out for you and your retirement withdrawl was not a large amount I don't think that will result in any additional tax being owed.  You didn't say what your income amount was but since you were only earning income for about half of 2016 and I'm sure had tax withheld from that as well I don't see you owing any additional tax from that either.  So you will be alright.

 

You can use the tax calculator on either the IRS website or the one on the H&R Block website to get a more exact idea of your refund amount if you would like.  Or you're welcome to message me with the amounts of your unemployment income & your wage income and then I'll figure your expected refund amount for you.

 

Louis

Valued Pioneer
Posts: 5
Registered: ‎09-07-2017

Re: 401k early withdrawal

Thank you so much again for helping me with this. I worked last year from Jan 1st -August 2nd. My hourly rate was $10 per hour and I usually worked around 36 hours per week. I'm pretty sure my unemployment checks were $376 every 2 weeks. They would've been like $421 or something but I had then take the taxes so I wouldn't have to deal with it later.

Sorry to ask so many questions about this. I really appreciate you.
Tax Pro
Posts: 5,539
Registered: ‎02-23-2016

Re: 401k early withdrawal

hcollett,

 

So based on the information you just provided me with here is where we came up:

 

Wages (30 Weeks):  $10,800

Unemployment (22 Weeks):  $4,136

Retirement Withdrawl:  $5,000

 

TOTAL INCOME  =  $19,936

Standard Deduction:  ($9300)

Exemptions:  ($9,100)

TAXABLE INCOME:  $1,536

 

Income Tax Liability:  $154

Child Tax Credit:  ($154)

Income Tax Liability:  $0

Additional Taxes (Early Withdrawl Penalty):  $500

Total Tax Liability:  $500

 

AMOUNT YOU OWE  =  $0

Additional Child Tax Credit:  $846

YOUR REFUND  =  $846 + Earned Income Credit + 100% of Your Withholdings

 

 

So you'll be just fine.  You're not going to owe any federal income tax, and your early withdrawl penalty will be wiped out by refundable credits & excess withholdings if you can't qualify for an exemption from that.

 

Note that this will change for 2017 if you don't work since you won't be eligible for the child tax credit or the earned income credit if you don't earn some income.  You still will not owe tax for 2017 though so long as your income doesn't significantly increase & so long as you make sure to have tax withheld from the incomes that you do have for this year.

 

Louis

Valued Pioneer
Posts: 5
Registered: ‎09-07-2017

Re: 401k early withdrawal

Sorry for bothering u so much but when I got laid off was August 2016, not 2017. So I've not worked any this year. The only income I've had this year was those couple months of unemployment. I think u maybe thought it was this year
Tax Pro
Posts: 5,539
Registered: ‎02-23-2016

Re: 401k early withdrawal

hcollett,

 

 

No problem at all.

 

The calculation I completed in the previous post was for 2016.  I assumed that you had unemployment since being laid off, however if you didn't have unemployment right away the only thing that will change is your taxable income will be less and your tax liability before applying withholdings and refundable credits will also be less, and your refund may therefore increase by a small amount.

 

For 2017 you will not owe tax based on the income that you've had so far, but you also will not get much of a refund because as I mentioned before, with no earned income you will not be eligible for the refundable tax credits.  If you work and earn some income you might see more of a refund for 2017.