Question

Danielle williams is a 29-year-old single taxpayer who changed jobs during the year. When she left her first job, she decided to take a total distribution from the 401(k) plan she had established with her former employer. She then used the proceeds to make a down payment on a new car. In early 2022, she received the following form 1099-r reporting the distribution. Her only other income was from wages, and her 2021 taxable income was $51,350. What will be the amount of the penalty for the early withdrawal from her 401(k) plan, if any?.

Answer 1

Danielle Williams will face a 10% penalty for early withdrawal from her 401(k) plan, which will be calculated as 10% of the total distribution amount. This penalty is in addition to the regular income taxes on the distribution.

Step-by-step explanation:

Danielle Williams will likely face a penalty for early withdrawal from her 401(k) plan because funds taken out before the age of 59½ typically incur a 10% early withdrawal penalty in addition to regular income taxes. The Internal Revenue Service (IRS) imposes this penalty to discourage the use of retirement savings for non-retirement expenses.

The amount of the penalty is 10% of the total distribution. For example, if Danielle took out $10,000, her penalty would be $1,000 (10% of $10,000). However, her total taxable income includes both her wages and the total distribution from her 401(k) plan, which will also be subjected to her regular income tax rate on top of the penalty.

Answer 2

The penalty for the early withdrawal from Danielle's 401(k) plan would be 10%, which works out to be $5,135.

Step-by-step explanation: