Early retirement withdrawal and the penalty
Cashing out a 401(k) before age 59½: the distribution is ordinary income AND carries a 10% additional tax. A costly lesson many learn the hard way.
Taxpayer facts
Who this is and what their year looked like.
Kevin is single, 34, and left a job in Cheyenne, Wyoming during the year. He cashed out part of his old 401(k) to cover moving and living expenses.
He has a W-2 from his new job and the 1099-R from the 401(k) cash-out. No exception to the early-distribution penalty applies. He takes the standard deduction.
- NameKevin T. Mbeki
- Date of birth03/06/1991
- SSN520-31-7746
- Age (as of 12/31/2025)34
- Filing statusSingle
- DependentsNone
- OccupationWarehouse supervisor
- Address1408 Carey Ave, Apt 2, Cheyenne, WY 82001
- ResidencyWyoming, full year (no state income tax)
- Penalty exceptionNone applies (general living expenses)
Source documents
Work from these the way you would a real client's paperwork. Everything is fictional.
Objectives
What a correct return should capture.
- Report the W-2 wages.
- Report the early 401(k) distribution as fully taxable ordinary income (Form 1040, line 5b).
- Recognize that distribution code 1 means an early distribution with no known exception, so the 10% additional tax applies.
- Compute the 10% additional tax on the early distribution (Form 5329, carried to Schedule 2).
- Apply the standard deduction and compute the regular income tax.
- Add the 10% additional tax to the income tax for the total tax.
- Reconcile both withholdings (the W-2 and the 20% withheld on the distribution) to the refund or balance due.
- Note that Wyoming has no state income tax, so there is no state return here.
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
Stuck? Work through it with Yehuda
A one-on-one, 30-minute tutoring session on this return with Yehuda Tenenbaum, EA. Bring the spot where you got stuck and we will work through it together: how the forms connect, why a figure lands where it does, and how to check your work. $250. This is education on the practice return, not advice on your own taxes.