What are the California tax consequences of taking an early withdrawal from my 401(k) or IRA?

In California, an early withdrawal from a 401(k) or IRA is taxed as ordinary income and is also subject to an additional 2.5% state penalty tax, on top of any federal penalties. Here is how to handle the California tax consequences of your withdrawal: Step 1: Confirm Your Withdrawal and Withholding Contact your 401(k) or IRA plan administrator to confirm the total gross amount of your withdrawal. Ask if any money was withheld for California state taxes at the time of the distribution. This helps you plan for your final tax payment. Step 2: Obtain Your Form 1099-R Your plan administrator is required to send you a federal Form 1099-R by January 31 of the year following your withdrawal. This document reports the distribution amount. You will need the information from this form to complete both your federal and state tax returns. Step 3: Report the Withdrawal as Income When you prepare your California income tax return (Form 540), you must report the taxable amount of the withdrawal as part of your regular income. This amount will be taxed at your personal California income tax rate, which is based on your total annual income. Step 4: Calculate the California Early Withdrawal Penalty You must complete and attach Form FTB 3805P, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts," to your state tax return. This form is used to calculate the 2.5% California penalty on the taxable portion of your early withdrawal. Important considerations: The 2.5% California penalty is separate from and in addition to the 10% federal penalty. This means you face a combined 12.5% penalty on top of regular income taxes. California generally follows federal rules for penalty exceptions, such as for a first-time home purchase (up to $10,000 from an IRA), total disability, or certain high medical expenses. Note: Failing to report the withdrawal and pay the associated taxes can lead to significant penalties and interest assessed by the California Franchise Tax Board (FTB). The combined state and federal tax impact can significantly reduce the net amount you receive from your withdrawal. This is general information and does not constitute legal advice. For complex situations, consult with a qualified California attorney.