If you were born before January 2, 1936, or are the beneficiary of a participant born before January 2, 1936, you may be able to elect optional methods of figuring the tax on lump-sum distributions you received from an eligible retirement plan. These optional methods can be elected only once after 1986.

If you actively participated in the plan before 1974, you can treat that portion of the lump-sum distribution as a long-term capital gain taxed at a 20% rate. 

You can also elect to figure the tax on the rest of the distribution using the 10-year tax option.

Then you may be:  (1) required to include the 20% that was withheld in gross taxable income for the year of the distribution; (2) subject to a 10% additional tax on early distributions for the 20% that was withheld.

Use Form 5329 (PDF), Additional Taxes on Other Qualified Plans (including IRAs), and Other Tax-Favored Accounts, to report the 10% additional tax.

You would not include the amount rolled over in gross taxable income for the year.

In addition, you would not owe a 10% additional tax on early distributions.

Generally, unless an exception applies, a distribution of your benefits from a 401(k) plan before age 59 ½ is subject to the 10% additional tax on early distributions from retirement plans. See Publication 575, Pension and Annuity Income .

Elective contributions to a 401(k) plan are subject to certain distribution restrictions.  See Publication 560, Publication 575 and Tax Topic 424.

Generally, the exception for using retirement funds to build or purchase your first home does not apply to a distribution of your elective contributions from a 401(k) plan.

If you are under the age of 59 1/2, a distribution (including a distribution of employer matching and profit sharing contributions) from your 401(k) plan subject to a 10% additional tax on early distributions.  This 10% additional tax is in addition to other taxes that apply to the distribution.

However, a 401(k) plan may permit loans and hardship distributions.  Depending on the terms of your 401(k) plan, you may be able to receive a loan or hardship distribution to build or purchase your first home.

Your plan administrator or employer should have written information about your particular plan (including the availability of loans or hardship distributions and applicable requirements) as well as other plan rules.

Generally, you need to include in income the total amount of the distribution, as reported on Form 1099-R (PDF), Distributions From Pensions, Annuities, Retirement on Profit-Sharing Plans, IRAs Insurance Contracts, etc.

If the distribution occurs before you are age 59 1/2, you may need to pay a 10% additional tax on early distributions unless you meet one of the exceptions.  See Publication 575, Pension and Annuity Income.

The federal income tax withheld from the 401(k) distribution along with federal income tax withheld from other sources should be reported on the appropriate line of your federal tax return.

Publication 560, Retirement Plans for Small Business

Publication 575, Pension and Annuity Income