401k Inservice Withdtrawal

[Guest gaglitm]

In 2004 I took a 401k inservice withdrawal, the amount was reduced by a 20% Federal Tax and some state tax. Now the IRS tells me I need to pay an additional 10% penalty. reading the tax forms, I do not qualify for the 10% penalty

excemption. Any thoughts on how to get around paying this penalty??

Thanks

[Guest gaglitm]

I should also point out that the withdrawal went towards college tuition payments.

Would this be enough for an exemption???

[Belgarath]

I think you are stuck. The tuition payment doesn't matter - that could make it eligible to be considered a hardship withdrawal, but doesn't affect the taxation in your situation.

[Blinky the 3-eyed Fish]

You don't say whether the 20% was withheld voluntarily or mandatorily. If the latter, then this was an eligible rollover distribution not a hardship. An eligible rollover distribution is a distribution which is eligible to be rolled over into an IRA.

Now comes the part where you kick yourself gaglitm if this was an eligible rollover distribution. There is an exemption to the 10% premature distribution penalty for college tuition payments if those funds are distributed from an IRA, but no such break for distributions from 401(k) plans. So, you could have rolled over the money into an IRA and then taken the money out of there to avoid the 10% penalty.

Let's just hope that it wasn't an eligible rollover distribution in the first place.

[JanetM]

Gaglitm, you should have received a special tax notice that explained the taxation and penalties.

[mbozek]

See IRS publication 575, P 28 available at irs.gov.

[Guest gaglitm]

Blinky, you right on. I did not roll it over to an IRA, even though it was qualified.

I suppose I'm stuck paying the IRS. Thank you all for your responses.

[Blinky the 3-eyed Fish]

Live and learn. Just consider it a premature tuition increase and maybe that will make you feel better.