Tax Credit & 401k withdrawal

Tax Credit & 401k withdrawal

Hi Everyone,

I switched employers and closed out my 401k. I know I am going to get charged the 10 percent early withdrawl tax and the California state tax. I was wondering if the 7500 tax credit would help offset that?

Rocky_H | 7 June 2018

What? Why would you do that? Yeah, that's a 10% penalty, plus your tax rate. Whenever you leave or change employers, you always have 30 days to roll that out into an IRA so that it avoids that early withdrawal stuff.

stevenmaifert | 7 June 2018

In most cases, the amount of money in your 401K that was tax deferred now becomes income in the year it was withdrawn and is added to your total income. Because of the changes to the tax code in 2017, the IRS Form 1040 for 2018 will be different, but if you had done that in 2017, the tax deferred amount would be reported on Line 16b. The Qualified Plug-in Electric Drive Motor Vehicle Credit can be used to offset the additional taxes owed.

Referring to that same 2017 IRS Form 1040, the 10% penalty for early withdrawal is applied at Line 59 and cannot be offset by the EV tax credit as that is an additional tax that comes after all other tax credits have been applied. The Line 59 instructions found in the IRS Form 1040 booklet gives further info.

EVRider | 7 June 2018

I think you actually have 60 days to roll over to an IRA. If it’s not too late, you should do that; why pay the penalty and taxes if you don’t have to?

Musashii | 7 June 2018

I ended up paying some credit card debt.

So if I'm interoperating your note correctly stevenmaifert, I should still be able to reduce my taxes that I owe with the 7500 credit?

I know my previous employer withheld 20 percent, and I know that I fall in the 24 percent tax bracket for 2018 taxes.

stevenmaifert | 7 June 2018

@Musashii - Yes. Any 401k tax deferred money withdrawn is added to your other sources of income listed on Lines 7 thru 21 on IRS Form 1040. The taxes on that income can be reduced by the EV tax credit. If the EV tax credit does not reduce what you owe to zero, you then use what your employer withheld to pay the remainder. Any excess withholding comes back to you as a refund. If the EV tax credit reduces your taxes to zero, you don't get any unused tax credit back, but you would get back all of your employer withholding. That said, you will still have to pay the 10% penalty for early withdrawal and the EV tax credit cannot be used for that. However, any excess withholding can be used.

Musashii | 8 June 2018

thank you for being so helpful!

SCCRENDO | 8 June 2018

Sounds to me you should consult a financial advisor. Many here think that you are making some not so smart decisions. So perhaps you would get better advice from a financial expert.

Demixl | 18 February 2020

Yeah I think that a financial advisor is your best option at this point, just because 401K is something very important. It's your retirement money and the fact that you are taking it out early will always be penalized by extra taxes. A family member of mine did that and he ended up paying up to 22% tax penalty just because he took out the money from his 401K account earlier then he was allowed. In general early retirement is very hard to achieve just because you do get money in your account from your employer and they don't want to lose the labor. (If you don't really know much about 401K you can read about it here: Overall it's easier to retire when you are close to your retirement age and not touch the money in the 401 because it's heavily taxed ad it's more trouble to take out the loan then anything else.