[kkid]

Hello,
In 2007, I withdrew money from a 401K plan and had the maximum amount of federal & state taxes withheld. I expect to pay an additional 10 percent penalty.

In preparing our 2007 taxes, my wife and I had a $2100 refund. Upon entering the 401K income into TurboTax, it calculated an amount due of $4100.

Does a possible refund not offset the 10 percent penalty due on the retirement income?

Thanks!

[ebaines]

You didn't tell us how large the withdrawal was, so we can't say whether this is correct or not. When you entered the data on your withdrawal into TurboTax, did you also enter the amount of taxes already withheld? That figure should be shown on the 1099-R form that you should have received. Also, for distributions like this they normally withhold 20%, but if you are in a higher tax bracket than that you will owe additional income tax. Depending on your particular circumstance, the extra income from the withdrawal may also cause you to reach or exceed the various phase-out provisions for things like itemized deductions, which makes for an even higher marginal tax rate on the withdrawal.

[kkid]

The approx. gross distribution was $35k. I requested the full amount of federal and state taxes be withheld.

I input all of the information provided on the 1099-R into TurboTax and that included both federal and state taxes withheld.

Our gross income in 2007 was $158k not including the 401K distribution.

[ebaines]

What do you mean by "I requested the full amount of federal...tax withheld"? How much did they actually withhold? For federal taxes I would guess they withheld 20%, or $7000 from the gross distribution - is that correct? With your gross income of $193K you are in a 28% tax bracket (I assume married filing jointly). This means the actual income tax due on the distribution is 28% of $35K = $9800, or $2800 more than was withheld. Add this to the 10% penalty: $2800 + $3500 = $6300 additional taxes and penalties due, which is almost exactly what TurboTax calculated. Hope this helps.

[ScottGem]

In point of fact, 401K distributions are not subject normal withholding. I believe the 20% figure is what's allowable by law and that's only federal. So your 1099 should show $7K withheld. So ebaines calculations make total sense. Subtract the $2100 refund you calculated before entering the 401K info and you you get $4200 in federal taxes due. Sounds like TurboTax is right on the money.

[AtlantaTaxExpert]

Agreed!