Generally, there are strict policies that govern withdrawals from an employee 401(k) account if the employee is below the age of 59 ½. There are only a few circumstances when such an employee can make a withdrawal from the account which is made of tax-deferred contributions. Commonly known as hardship withdrawals, these are of two types. One type is where if the employee makes a withdrawal from the 401(k) account, they are charged a 10% early withdrawal penalty. And other, where there are exceptions when an employee can make withdrawals from the 401(k) account without the 10% early withdrawal penalty. However, circumstances in both types are subject to 20% withholding tax. Also the withdrawal made is considered as ordinary earning and is hence subject to income tax as well.

An employee will need a form 1099-R and form 5329 apart from form 1040 for filing these taxes.

• In form 1099-R, one has to fill the total withdrawn amount in – ‘1 Gross Distribution’. The ‘Taxable amount’ and ‘Federal income tax’ withheld go in the boxes 2a and 4 respectively the details of which will be provided by one’s plan provider.

• In form 1040, the same amount that is put in 1099-R’s ‘Gross Distribution’ is to be entered in ‘16a - Pensions and annuities’ and the ‘Taxable amount’ from 1099-R is to be entered in ‘16b’.

• One needs to fill the first section of the 5329 form, that is – ‘Part I’ and if they do not qualify for any other sections. This will then provide the necessary information to be put in line ‘59 – Additional taxes’ (AEIC payments) of the 1040 form. Information may also be needed to be put in line 58 of the 1040 form.

The only difference in filing when an employee takes qualified distributions after the age of 59 ½ or required minimum distributions after the age of 70 ½ is that they do not pay 10% penalty and the 20% withholding tax. In both cases, the employee does pay income tax on the distributions or withdrawals as, according to the features of the 401(k) plan the invested funds are taxed only upon withdrawal.

Extreme caution must be taken while filling the forms. Also, these are just the basic instructions; detailed instructions for filling the forms are available on the IRS website. One might need to do proper calculations for filling the forms and take professional help if necessary but generally the plan provider will provide the necessary information. It should be noted the way the forms are to be filled will depend on the financial circumstances and also the kind of withdrawal.