29 Dec How can I get back a penalty taken for 401(k) withdrawal?

Q. I took a 401(k) distribution in April 2020 due to being laid off. At the time the CARES Act didn’t exist and I was charged a 10% early withdrawal penalty. How do I get that money back? Do I ask the custodian or wait until I file my taxes?
— Unemployed

A. We’re sorry to hear you have lost your job.

So many people have turned to their retirement accounts to get themselves through this difficult times.

Your 401(k) custodian is required to withhold federal and state income taxes on 401(k) distributions, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Your custodian is also required to withhold an additional 10% of the distribution if you are under the age of 59½, he said.

As you noted, after the pandemic took hold of the country, Congress enacted the CARES Act.

One of the provisions of the act was the temporary elimination of the 10% early withdrawal penalty from retirement accounts, and this was made retroactive to the beginning of the year.

“When your 401(k) custodian withheld taxes and the 10% penalty from your distribution, they paid the funds to the IRS,” Kiely said. “Your custodian no longer has the funds so it can’t pay it back to you.”

Early next year you will receive a 1099-R form showing the gross distribution and taxes and penalty withheld, Kiely said.

Additionally, on the form 1099-R, there is a box #7 “Distribution Code(s).”

“The code on your 1099 should be #2 – Early distribution, exception applies (under age 59½),” Kiely said. “This code notifies you or your tax preparer that the 10% penalty doesn’t apply to you. You will receive the additional 10% that was withheld as a tax refund which you will receive after you file your 2020 federal income tax return.”

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This story was originally published on Dec. 29, 2020

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