This 401(k) withdrawal was wrongly penalized. What can we do?


Q. My husband left his job and withdrew his 401(k). When our taxes were filed, we paid all taxes that were due. There was a 10% penalty for early withdrawal but there is an exception which states that if you are 55 years old in the year you withdraw and leave your job, you will not be penalized the 10%. Well guess what? We are being penalized! Is this correct and if so how do I get the IRS to clear this up?
— Annoyed

A. You’re correct, and you will have to take steps to get the penalty removed.

If the entirety of the withdrawn funds was included as part of your gross income and you paid income tax on the full amount of that withdrawal, then the 10% penalty should not apply.

But if the funds were rolled over to an IRA before the withdrawal took place, then the penalty stands, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

For example, he said, let’s assume the 401(k) had a value of $100,000 when your husband left his job, and he took a direct withdrawal for the entire $100,000. There would not be a 10% early withdrawal penalty, Karu said.

But if he rolled those funds into an IRA and then withdrew any amount, the 10% penalty would stand because he would have needed to wait until age 59½ to avoid it the penalty, he said.

“Given that you have been assessed the penalty, you would need to respond to the Internal Revenue Service stating that he left his job, that he was 55 or older at the date he left, and the penalty should be abated,” he said.

You can learn more about how to contact the IRS on its website.

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This story was originally published on Sept. 16, 2021. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.