I recently cashed out a 401K. The holding company withdrew 20% for federal taxes, as well as an additional penalty. Will I be required to pay any additional taxes or penalties on this in with 2006 taxes (i.e. state income tax)? Are there any forms or paperwork I should be aware of? Thanks in advance for any help on this.

Unless you are exempted with special circumstances*, you will be assessed the 10% penalty, and it will be added to your income. The 20% was an estimate to pay against Federal Tax liability. There are no other direct penalties for early 401k withdrawal, although increasing your yearly income may have other tax implications.

At the end of the year, you will be 1099'd for the amount which you will use to fill out your taxes.

*One of the special exemptions is if you turned 55 in the year you separated from your job.

Actually the "hardship" rules for 401(k) plans are about whether the plan is required to allow employees to take a distribution - not whether the distribution is subject to the 10% penalty. Most "hardship" withdrawals are actually subject to the 10% penalty (if the person is less than 59-1/2 years of age). But since this original post is over 6 years it's probably moot anyway.

The exemption from the 10% penalty applies if someone "separates" from their job in the year they turn 55. Source: IRS Publication 575 - page 33

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Originally Posted by CliffARobinson

The exemption from the 10% penalty applies if someone "separates" from their job in the year they turn 55. Source: IRS Publication 575 - page 33

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Yes - but then it's not a "hardship" withdrawal, which is what you had mentioned.