401(k) Early Distribution Tax Penalty

If I withdraw my 401(k) and give it to my spouse as a gift, would I still face a very steep tax penalty?

If I withdraw my 401(k) and give it to my spouse as a gift, would I still face a very steep tax penalty?

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Bill's Answer
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Highlights


  • Congress permits two types of hardship distributions.
  • File a Form 5329 to report the tax on early distributions.
  • Your plan administrator will send you a Form 1099-R.

Congress and the IRS call withdrawals from a 401(k) or other qualified retirement plan a distribution. In general, if you take a distribution from a traditional individual retirement account such as a 401(k) or other qualified retirement plan before you turn age 59½, you are subject to a 10% penalty tax. The taxable amount is added to your taxable income. Put another way, the 10% penalty tax is in addition to your regular income taxes. Please note that the associated penalties and taxes are applied at the time of your withdrawal transaction, so even if you plan to gift the proceeds later on, you will still be liable for the penalties and applicable taxes.

All 401(k) Distributions Are Subject to Income Tax

You can avoid this additional tax penalty if you meet certain criteria, but you cannot avoid including your retirement withdrawal from your taxable income. Some distributions can be made without penalty, but these usually require a financial hardship. I will provide more information about 401(k) hardship-based distributions in a moment.

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Here is more information about hardship-based distributions.

Hardship Withdrawals

Hardship withdrawals, called "distributions," are permitted from 401(k) plans. They are subject to applicable income taxes and a 10% early withdrawal penalty if you are younger than 59½.

Financial hardship withdrawals are allowed for the following reasons:

  • To buy a primary residence
  • To prevent foreclosure or eviction from your home
  • To pay college tuition for yourself or a dependent, provided the tuition is due within the next 12 months
  • To pay un-reimbursed medical expenses for you or your dependents

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Early Withdrawal Penalty Exceptions

You may qualify to take a penalty-free withdrawal, but are still subject to income taxes,  if you meet one of the following exceptions, consistent with Section 72(t) of the Internal Revenue Code:

  • You become totally disabled.
  • You are in debt for medical expenses that exceed 7.5% of your adjusted gross income.
  • You are required by court order to give the money to your divorced spouse, a child, or a dependent.
  • You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
  • You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59½, whichever is longer).

See the IRS documents 401(k) Resource Guide - Plan Participants - General Distribution Rules and Publication 575 (PDF) to learn more about 401(k) distribution rules.

Consult With a Tax Professional

Speak with both the 401(k) plan administrator and a tax professional to make certain that you understand your total tax obligations. I have seen many people who thought they had accounted for all taxes owed, only to find out that they owed a lot more, once the return was prepared. For instance, a large 401(k)withdrawal can raise the total income for the year to the point where the taxpayer falls into a higher income tax bracket. When that happens, the amount that the taxpayer was having withheld from his or her regular paychecks may prove to be insufficient to cover the tax obligation at the new, higher tax rate.

Even worse, if a person files an incorrect return, understating the taxes owed, it may take years for the IRS to catch the error. Once the IRS does correct the error, it is the taxpayer who will owe the taxes plus years of interest and penalties.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

281 Comments

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  • 35x35
    Dec, 2012
    Chris
    Is it worth the penalty to take money out of my 401(K) to get rid of a 20K credit card debt?
    0 Votes

    • 35x35
      Dec, 2012
      Bill
      Chris, I don't think there is a one-size-fits-all answer to your question. The interest rate you pay on your credit cards is an important factor, as is the tax bracket you're in, and size of your retirement account. Remember, it is not just the penalty you have to factor in, but the need to include the disbursement as income (as well as the future loss of income that you could gain from holding the money in your retirement account as you originally intended).

      Run the numbers, figuring out the total cost to pay off your credit cards at your anticipated rate of payment and compare it to the costs in taxes and penalties for withdrawing from your 401(k).
      0 Votes

    • 35x35
      Dec, 2012
      Morcasa
      Can you tell me if there is a website that can help calculate the fed and or state income tax that will apply to this distribution, depending on info using last year returns and state of residence? I am in the same position with deciding whether I want to withdraw to cover a debt. I have heard that if if you move into a new tax bracket, the tax for the increased income is at a higher rate, however the previous income remains taxed at the lower rate. Any guidance or direction is appreciated.
      0 Votes

    • 35x35
      Dec, 2012
      Bill
      Here is some information I received from our friends at Freedom Tax Relief:

      TurboTax has a free online calculator called "TaxCaster 2012" that is pretty user-friendly. Depending on the type of account the distribution is from, age of the taxpayer, and whether any exception applies, the distribution may be subject to an additional 10% early withdrawal penalty. I am not aware of any similar calculators for states, but some paid tax software programs have estimating features that will do state calculations as well.

      The second part of your question is about progressive income rates. If the distribution moves your taxable income into a higher tax bracket, it will in effect cause some of your total income to be taxed at a higher rate.
      0 Votes

  • 35x35
    Jul, 2012
    Adrian
    I'm going through a divorce, I'd dont want to displace my children, in order for my wife to financially afford the house I've considered paying down the principal with proceeds from my 401K If I wait for a QDRO, woud this transaction be exempt from the 10% penalty, but still be considered as taxable income? If I choose to waive the QDRO, do I face a 10 or 20% early withdrawal penalty? Thanks for your help
    0 Votes

    • 35x35
      Jul, 2012
      Bill
      According to the IRS, a Qualified Domestic Relations Order (QDRO) is a judgment or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant. For tax purposes, a spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant. This means your soon-to-be-ex-spouse can roll the distribution into an IRA to avoid any penalty taxes. I am not aware of a tax-free manner for you to pay-off a mortgage for your soon-to-be-ex-spouse's house without you paying a tax penalty. However, after your administrator receives the QDRO order, it may be possible for your ex-spouse to take a distribution tax-free for the purpose you described.

      It is impossible to give you any tax planning advice without knowing more about your situation. If, for example, you are high-income and your spouse is low-income, it may make more sense for her to roll the QDRO into an IRA, and then take distributions as needed.

      Before taking any steps that will impact your finances, be sure to consult with your lawyer to understand the implications of your actions.
      0 Votes

  • 35x35
    Jul, 2012
    Anoymous
    Hi, I no longer work for my employer and I will not have a full time job for quite some time. I want to pull out the money I have in there to help me out with my current financial situation ($800), what should I do?
    0 Votes

    • 35x35
      Jul, 2012
      Bill
      You should contact the 401K plan administrator. Remember that you will pay a penalty and have to declare the withdrawal as income on your taxes for 2012 that are due next April.
      0 Votes

  • 35x35
    Jul, 2012
    Eddie
    Hey, I'm 28, was only in the Army for 3 years, but I put ALL my money in the TSP, now I want it out. Honestly, I had no idea they would keep 20% income tax?? I'm ok with the 10% penalty for early withdrawal, but how can I avoid losing 20% of MY money that I earned while in the service, and who gets that money(where does it go), and why???? I would have been better off just putting it in a savings account, I'm a little upset about losing my EARNED money just because I elected to put it in a safe account that had the ability to accrue me a little interest over the past 3 years. Can I transfer it to an outside account or other 401k type to avoice TSP's 20% tax?? Thank you so much.
    0 Votes

    • 35x35
      Jul, 2012
      Bill
      A Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees. It is, in essence, the same idea as a 401(k). It is not intended as a savings account. It is intended to be a nest egg waiting for you when you retire. To encourage people to leave their TSP accounts untouched until they reach retirement age, the rules require the TSP administrator to collect a stiff penalty if there is an early distribution. TSP savers have the option to roll their TSP account balances into an IRA when leaving government service. However, the rules for taking a distribution from an IRA are equally stiff. See the TSP.gov Taxes on Your Withdrawal Web page to learn more.
      0 Votes

  • 35x35
    Feb, 2012
    Brittany
    I withdrew on my 401K to do repairs on my home due to flooding and mold. Having the conditions stay without repair would have caused medical issues and further home stability issues if they were to go on unrepaired. Could this be considered hardship or does this not qaulify?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      Even a hardship withdrawal is subject to penalties and taxes, unless it meets a narrow set of circumstances. I don't believe that your situation falls into one of the permissible penalty-free categories.
      0 Votes

  • 35x35
    Feb, 2012
    jonathan
    Bill, Interesting question. I left a previous employer in December of 2010. I requested a rollover of my 401k in a check directly to my new employer. As I am a severe procrastinator I never sent the check in to be deposited. Since the check was never made out to myself and never deposited, am I going to be subjected to paying taxes on it? Thanks for the help, Jonathan
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      You have 60 days from the date you receive a distribution from a 401(k) to roll it over into an IRA or similar plan. If you miss the 60-day deadline, you are subject to the 20% penalty tax. See IRS Publication 575 to learn more. Consult with a tax lawyer or smart tax preparation specialist to learn if you have options for avoiding the tax.
      1 Votes

  • 35x35
    Feb, 2012
    Joseph
    Bill, My wife was laid off 3 years ago and in 2011 we closed out her 401k (abt $34k) to keep paying the mortgage and doctor bills. She is currently 59 and I am 55. We paid the 20% taxes when we withdrew the money and was wondering if there is a way to reduce the 10% penalty. It's not a lot, about $2400, but that would cover almost two months of mortgage payments. Thank you for the advise.
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      See the IRS' 401(k) Resource Guide - Plan Participants - General Distribution Rules for a discussion of the medical exception to the 10% tax rule. Also, was your spouse age 59½ or older when the distributions occurred? If so, the 10% tax does not apply.
      0 Votes

    • 35x35
      Feb, 2012
      Joseph
      Thank you for the response, unfortunately she was not 59½ yet.
      0 Votes

  • 35x35
    Jan, 2012
    Ron
    Hi, I was laid off in February 2011. At the time I owed $16k to pay my 401k loan. The 401k company used to deduct the loan amount monthly from my paycheck. Once I was seperated, I was given 90 days to pay off my entire loan in full or face penalty and would treat this loan as taxable income. For the next 4 months I was out of work and couldn't pay off my loan. So now that I am preparing to do my taxes for 2011. I am stuck with 16k taxable income. I am not sure about the 10% penalty. Could I avoid the 10% penalty because of hardship and I was out of work. THanks a lot Ron A
    2 Votes

    • 35x35
      Jan, 2012
      Bill
      Being out of work is not enough to cover the hardship requirements, as set down by the IRS. The non-penalty hardship cases are most stringent. I recommend that you confer with your tax professional regarding your total tax obligation for 2011.
      0 Votes

  • 35x35
    Jan, 2012
    k
    I'm 61, unemployed and homeless for two years. Cashed in my 401K to buy a foreclosure home. Do I have to pay income tax on the withdrawal? What if I don't have money for 35% taxes? Thanks so much. I thought unemployment was scary. Facing taxes is much worse!
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      If you had a traditional 401k retirement account, then your withdrawal is taxable income. A Roth account, that has funds deposited after tax was deducted, is not taxed on withdrawal. I recommend that you speak with a tax expert to see what are your tax requirements. Also, check the tax rate that you are paying, as 35% sounds too high.
      0 Votes

  • 35x35
    Jan, 2012
    Amber
    I was recently let go from my employer. I had a 27k 401k loan balance. As i have no way of repaying the loan am i smart to just cash the whole thing out to avoid paying penalties twice?
    2 Votes

    • 35x35
      Jan, 2012
      Bill
      If you do not repay the loan, then that sum will be considered a distribution and you will have to pay the taxes and penalties for the withdrawal. For more information read the Bills.com article about 401K loans. Try to avoid taking a distribution from your 401k account.
      0 Votes

  • 35x35
    Nov, 2011
    jai
    My son was diagnosed with brain cancer in oct 2010. At the time I was paying child support. He had to come live with me and I was unable to work regularly because of his treatment schedule. I had 2 401ks from 2 different past employers both under 3 thousand dollars one was refunded without tax penalty the other now says that it has to be moved or withdrawn. My mortgage is behind and I would like to withdraw the second without penalty. Does financial hardship due to time off for cancer care qualify for deferrment of the extra penalty tax?
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Foreclosure prevention does not exempt a person from the 10% penalty. However, if you are incurring medical care up to the amount allowable as a medical expense deduction then the distribution is tax-free. Follow the link above to the 401(k) Resource Guide - Plan Participants - General Distribution Rules and see the subsection entitled "Tax on early distributions."
      1 Votes

  • 35x35
    Nov, 2011
    Frank
    Hi Bill, Last year I took at 25K loan against my 401K. The payment schedule is over 5 years. However, things have changed at my job and I would like to seek employment elsewhere. I contacted the company (not the plan administrater at my office) and they told me that they only way I can pay down the loan is in-full. There are no exceptions... I can't increase my payments to pay off in a year, etc. Needless to say, I don't have the 20K remaining and can't pay it off. Is my only option to take the distribution so I am not "handcuffed" to my current job? Are all retirement service-providers like this? Or, is this a unique rule with mine? Please advise as leaving my current job would also mean substantial increase in earinings. I'm 48yo. Thank you.
    0 Votes

    • 35x35
      Nov, 2011
      Bill
      Alas, the rule your 401(k) administrator quoted is not unique. It is found in 29 CFR 2550.408b-1 - General statutory exemption for loans to plan participants and beneficiaries who are parties in interest with respect to the plan. In general, 401(k) participants may borrow up to 50% of their vested amount or $50,000, whichever is less. If repaid on time, the loan is free from taxes and penalties. A typical interest rate is prime or prime plus one percent. Most plans have a five-year repayment window, and if the borrower leaves the employer before the loan is repaid, the borrower must make the payment in full within 30 to 90 days.

      If the borrower ceases employment and does not repay the loan, or simply does not repay the loan, the loan is treated as a distribution and is taxed as such.
      0 Votes

  • 35x35
    Oct, 2011
    John
    I currently have a vested 401k account in the amount of $20k, I took out a loan of $5500 but now I have to move to a diffirent state, would I be able to withdraw the remaining $15k?
    1 Votes

    • 35x35
      Oct, 2011
      Bill
      Discuss your plan's distribution rules with your 401(k) plan administrator. Consider rolling your balance into an IRA, which will result in no negative tax impact for you.
      0 Votes

  • 35x35
    Oct, 2011
    Angela
    I have a vested 401k from my previous employer currently valued about $20,000. Due to worsening symptoms from an onset medical condition, I was no longer able to meet all of the job requirements of my position and my employer was unable (or unwilling) to provide the 'special accommodations' requested by my physician; therefore I was let-go (if that's the correct term) but eligible to collect unemployment compensation (UE) (the amount approximately 1/2 of my regular salary). After all of the approved Tiers & extensions, my UE comes to an end in two weeks. Because of my medical condition, it has been more difficult for me (vs. the general unemployed population) to find employment, and although I have over 30 years of experience, I do not have a college degree. My medical symptoms have gotten worse, with frequent unpredictable and acute onsets, where I become completely incapacitated, sometimes for days. I am considering filing for disability, as it is probably my only option (and honestly not one I'm thrilled about - the compensation will be close to poverty level, with shoddy health coverage, if any (not good when you have multiple health conditions) as well as the "mandatory" 2-3 year wait, and all the red tape that comes along with it. (Sad to think that SS is money that I EARNED, that came out of MY paycheck the past 30 years, yet still have to battle the gov't. for it when it's desperately needed...). Anyway, my question is, if I wanted to close out my 401k account within the next month or so (after putting in my application for SSI -- if that matters), to pay rent & bills & medical care, etc., will I still be taxed and penalized the full percentage amounts, even with the (lower) UE wages received in 2010 & 2011 and my medical condition/disability (and also receiving ZER0 income, which will be the case when my UE ends)? Would I qualify for any exceptions? (I wish the law would change for 401k's of lower value's like mine (e.g.: under $30,000), where they would ease up on penalties for withdrawing or closing small (& inactive -- I haven't added to it in 2 years) accounts due to hardship! Wishful thinking, I suppose. Thanks.
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      See the link in the original answer above to the IRS Web page that contains information about the 401(k) distribution guidelines. You may qualify for a medical hardship, or a hardship based on what I guess may be an inability for you to pay your rent or mortgage.
      1 Votes

  • 35x35
    Oct, 2011
    Kelly
    Hi Bill. Unfortunately I had to cash out my 401K to live. I'm sure you have heard this a lot. I'm confused about something that took place in the whole process though. I had 25,000 and when the financial group cut the check I was sent 19,000 (I'm rounding off) The rest was sent to the company I used to work for...made out to them. Why wouldn't it have been sent to the IRS? Just thought you might be able to shed some light on the process of dissolving a 401K. Thanks so much! KM
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      I don't know for sure, but perhaps something required the company you used to work for to handle the withholding portion of your disbursement. Was the disbursement done within the same year that you stopped working for the old firm? Were you fully vested?

      If the money turns out to belong to the old company, due to a lack of vesting, then you should not have to pay any taxes on that portion. In any case, make sure to discuss this with a tax professional, to ensure that you are properly credited with what was withheld and that you pay the proper amount of taxes.
      0 Votes

  • 35x35
    Oct, 2011
    Donna
    My sister is 63 and has a 401k. She is on FLMA sick leave but employment will not be terminated until 12/31/2011. Her sick pay has run out. She has no income and wants to cash out her 401k, but is getting different answers when she calls the plan. Can she cash out the plan if she has not terminated her employment and should she be able to role over the moneys to an IRA she has?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Please reread the original answer above to learn the 401(k) guidelines plan administrators must follow for a 401(k) distribution. I chose the word guidelines intentionally. Plan administrators, when creating a 401(k) plan, have the latitude to make distribution rules tighter than the guidelines allow. Your sister needs to meet with the plan administrator and learn exactly what the plan allows for hardship distributions.
      0 Votes

  • 35x35
    Oct, 2011
    Justin
    What to do? Borrowed 35K from my 401k to purchase my first home back in dec2010. Used only a portion of the funds for down payment and closing costs. Have 10k in my savings of that cash. I'm paying back the loan on a monthly basis for 30yrs and I'm still with the employer. Can and if I decided to not pay the loan back, I would assume I would be pay taxes on the whole $35k, correct? Would that make sense to do? Is there a rough # you could provide me of taxes I would expect to see or who I could work with on finding that out?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      I am not a tax professional, so I can't give you tax advice, but I will share some thoughts with you.

      It is my understanding that the unpaid portion of your loan will count as a disbursement, once you default on your loan payments. You will be subject to a 10% penalty on the unpaid portion of the loan and have to declare the unpaid portion as income, too. The taxes you will have to pay depend on your tax bracket. Figure you will pay another 30-40% in state and federal taxes. A tax professional can review your current withholding for the year and your income, to give you a more solid number.
      0 Votes

  • 35x35
    Oct, 2011
    Robin
    My company is offering early retirement Anyone 55 and older with 20 plus years can take it. Company is adding 5 years to age and 3 to length of service. I'm 55 so I can take it. One of the "benefit's", according to our material is that we can take a one time draw from our 401k with no penalty. How can I confirm this with the IRS?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Because you end up responsible for any taxes due, if you call the IRS and they give you the wrong answer (that's pretty amazing, isn't it?), I recommend that you speak with an experienced tax professional. One, you will likely get an accurate answer. Two, if you don't, you have someone you can hold responsible for any consequences resulting from wrong professional information.
      0 Votes

  • 35x35
    Oct, 2011
    jason
    Looking for confirmation of this; I am 35, married with 5 little girls, I earn around 30-33k a year (sole earner)and have more than qualified for a full refund + credits for the past few years. When my company switched 401k providers, I opted for a full withdrawal ($8000 or so). I payed taxes and penalty on the money, but with my income this year, I should still be well within the bracket for a full refund + credits (42k, I belive). Shouldn't I expect to recieve the taxes paid on my withdrawal as well?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      I cannot answer detailed tax-related questions because I never have enough facts at hand to offer a meaningful answer. Do a dummy or draft 1040 to see where you will stand regarding your tax return next year.
      0 Votes

  • 35x35
    Sep, 2011
    Mike
    I am 39 Years old. I just made a withdrawal of 105K (20K was in the form of a loan I had already taken) from an account with a previous employer (>5 years ago) to pay off some loans and credit card debt. A 64K check was sent to me >> 105K - 20K (loan) - 20% (of entire 105K). I know that I will need to pay between 5-8% more in tax above the 20% (due to my tax bracket) and an additional 10% tax on the entire 105K (approximately 16 - 19K) leaving me with ~45K available for paying off these debts. I am not sure if this classifies as a hardship or not, but the administrator of the plan had no issue transferring the funds to my checking account. Does the IRS care if this is for a hardship withdrawal or can you withdrawal the funds for any reason if the administrator of the retirement account allows it and the additional 10% penalty is paid? Will the IRS follow-up and require more documentation than the required tax forms?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      See the IRS document Publication 575 to learn how to report a 401(k) distribution on your federal income taxes.
      0 Votes

  • 35x35
    Sep, 2011
    Melissa
    I'm 23 and left my former employer of just over 4 years in March. I now work for the Colorado State Government and am diverting 10% of my paycheck to the Colorado PERA retirement fund. I am currently paying my (college) student loans, repaying over $5000 in credit card debt accrued in college, and also assisting my boyfriend in his education by covering well over the majority of our bills. I am debating cashing out the 401k of my old employer, and I do understand the tax penalties and consequences. However, my question lies in how the income of the 401k withdrawal gets added to your current income? For example, my former employer's 401k plan has roughly $4100 invested in it, and requires 20% to be withheld for fees (I can choose a higher amount to be withheld, and I was considering withholding 35-40%). Would the full $4100 be added onto my current yearly income, or the amount after the original IRS penalty? It matters since my income is just under 31k/year and it could possibly push me into the next tax bracket. Thanks much!
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      The gross amount is added to your income. Indeed, taking a 401(k) distribution often bumps a person into a higher tax bracket.
      0 Votes

  • 35x35
    Sep, 2011
    anthony
    I have a 401k from a recent employer worth about 4k. My current employer doesnt have a 401k, and i wanted to cash out now since it will no longer build. How much would i be penalized and taxed if i decide to cash out now?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      You will pay a 10% penalty and will be taxed according to your tax bracket. Some 401(K) plans will withhold a set amount, for example 20% of your withdrawal. No matter what is withheld, you have to cover all the taxes due come April 15th the next year. If you had more withheld than you owe, you will get a refund.
      0 Votes

  • 35x35
    Sep, 2011
    Kim
    I had taken out a loan from my 401k five years ago and was paying my plan back through my paychecks. I have been laid off and cannot pay off the loan before rolling over the remaining money in another 401k plan. What tax penalties am I looking out for the loan? Would this qualify for a hardship?
    0 Votes

    • 35x35
      Sep, 2011
      Bill
      Review your 401(k) loan document, which should address the circumstances you described in your comment.

      In general, when a person is unable to repay a 401(k) loan, they are taxed as if they received a distribution. You asked about a hardship. Did you have a hardship when you applied for a loan? If so, then you qualify for a hardship. If you did not qualify for a hardship when you applied, the fact that you have a hardship now does not qualify you for a hardship exemption.
      0 Votes

  • 35x35
    Aug, 2011
    Scott
    Trying to decide whether to cash out. I have a Roth 401k, do different rules apply? Only have about $14k. I'm still not certain on how much I will be penalized, taxed, etc. Fall into the 25% tax bracket according to your chart below. Have a second home being foreclosed, is that exempt, or must it be your primary residence?
    0 Votes

    • 35x35
      Aug, 2011
      Bill
      Consult with your 401(k) administrator to learn what distribution rules apply to you.
      2 Votes

  • 35x35
    Jul, 2011
    arlene
    this is the question. we have 2 different 401 k's we could clean one out for a home purchase so as cover 20% down and closing costs, while the interest rates are so low. the other is larger and would remain for retirement. Is this a good strategy, considering the interst rates at this time and the monies that would be saved both long term and also on the mortgage insurance. Our other option is to continues saving and roll the lower account over into a Roth acct. We are not yet 59 years old.
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      Here are a few items to consider, when making your decisiion.
      1. How important is the home purchase to you?
      2. How will your mortgage payment compare to the rent you currently pay?
      3. Do you meet the home purchase qualifications in your 401(k) plan to not have to pay the 10%?
      0 Votes

  • 35x35
    Jul, 2011
    Roland
    With this looming 'debtageddon', would it be wise to withdraw my 401K funds, regardless of the 10% and income tax penalty, in light of what may be a huge loss by the markets in general (upwards of 50% in value) after August 2nd, IF THE DEBT CEILING ISN'T RAISED?
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      Both choices, withdrawing now or not withdrawing have risks.

      If you are not planning to have a need to use the funds for a number of years, any drop that could occur will likely be overcome, if historical market trends prevail.

      If I knew that I needed to make a withdrawal this year or next, I would weigh things differently.

      Paying the 10% penalty and taxes on what you take out is a sure thing. There is still time for the Congress to pass legislation authorizing the increase in the debt ceiling. If you feel, as I do, that the consequences of default are so negative that a last-minute deal is going to get done, then you would be less likely to take any funds out.
      0 Votes

  • 35x35
    Jul, 2011
    Tiffany
    I am 28 years old and have separated from my previous job. I had my 401k and 457 plan with my employer for 10 years. What is the best option to avoid having to pay taxes at this time. I was thinking rolling it over into a ROTH IRA or just leaving it where its at. I don't want to pay 30% in penalties or any type of penalty really. What is the best option that you would recommend.
    0 Votes

    • 35x35
      Jul, 2011
      Bill
      Important components to answering your question include how much you expect to be earning in the coming years and what plans you have for a home purchase, college expense, or major medical expense in the next five years.

      An important difference between the Roth and standard IRA is that the Roth allows you to withdraw earnings contributions anytime tax and penalty free. Once you turn 59½ you can withdraw earnings tax and penalty free. A Roth also allows you to withdraw earnings after 5 years, penalty free, for the three categories I listed above: home purchase, college education, and major medical expense.

      I recommend that you speak with a financial planner or an entity that offers retirement plans. You can speak about eligibility requirements and the benefits of your various options.
      0 Votes

  • 35x35
    Jun, 2011
    Joana
    I will receive $75,000 as a divorce settlement, my spouse is taking it from his 401k thru his work as an early withdrawal and I have to pay the penalty and income taxes on this amount. When I receive the money will the penalty and income taxes already be deducted from the $75,000?
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      It is likely that some portion of your disbursement will be withheld by the plan administrator. How much is withheld depends on your individual plan. The key is for you to plan properly, so you don't spend or tie-up money that you will need to pay your taxes when they are due in April, 2012. Keep in mind that an increase in your income of $75,000 could raise your tax bracket and plan accordingly.
      0 Votes

  • 35x35
    Apr, 2011
    Terri
    My husband and I had our home foreclosed on. We have negotiated with Fannie Mae to keep our home by paying it off. My husband contacted his 401K people who told him he only had to pay 10% penalty. Everything I am reading suggests you pay the 10% plus another 20% when the money is withdrawn. We would rather pay it up front. Thanks
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      The 10% penalty tax was set by Congress. Any additional tax you would pay is a function of your income. In other words, there is no one-size-fits-all answer to your question. Fill out a dummy tax return for your expected income plus the 401(k) distribution to learn your tax rate. For example, if your earnings (wages, interest income, plus the distribution) are $373,650+ in 2010, your tax rate is 35%. If, to pick another extreme if your wages, interest income, plus 401(k) distribution is $8,375 or less, then your tax rate is 10%. Consult with a tax preparer to help you find your correct withholding.
      0 Votes

  • 35x35
    Apr, 2011
    dave
    Any further information concerning the Obama Recovery Act and its impact on the 10% penalty for early withdrawls.
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      We have not seen any action by Congress to suggest the 10% penalty tax will be suspended.
      0 Votes

  • 35x35
    Mar, 2011
    Alex
    In 2009, I withdrew my 401K for financial hardship and had the investment company retain 25 percent Federal taxes as well as the 10 percent penalty (under 59 1/2). I recently received a letter from the IRS indicating that I owe them $3,060, which is exactly 10 percent of my gross distribution from the 401K account. After talking with the IRS on the phone today, they indicated that I should have filed a Form 1040 with Form 5329 (I filed a Form 1040A). As a result of this, the IRS indicated that I received a larger refund in 2009 than I should have if I had properly filed Form 1040 with Form 5329. I am still confused over this. I had the investment company retain the 10 percent, so why is it now that I owe exactly another 10 percent of the gross distribution?
    0 Votes

    • 35x35
      Mar, 2011
      Bill
      Tax questions are difficult for me to answer precisely because my window into the reader's situation is too small. Here, you have two options:
      1. Take your correspondence, the tax return in question, and the notes of your conversation to a tax attorney or CPA and ask them to help you learn if your math or the IRS's is accurate.
      2. Complete your own 1040 (not a 1040A) and Form 5329 to see what, if any, change you see to the bottom line.

      My guess — note that word choice — is you will see a significant difference in either the amount you would have owed the IRS, or a significantly smaller refund.

      0 Votes

  • 35x35
    Mar, 2011
    nigel
    My wife just left her job and cashed out her 401K (around 16K) to help pay a hefty tax bill related to my earnings as a self-employed consultant (I didn't pay taxes throughout the year). After the 401K company took 20% we had around $13K sent to us. Anyhow, I intend to pay back within 60 days, but will only have around $10K to pay back (I have some stock vesting but not until May hence the need to pull all the 401K out...just bad timing). If I pay back the 10K, am I only liable to the early withdrawal penalty and any apllicable income taxes on the 6K?
    0 Votes

  • 35x35
    Mar, 2011
    SHANE
    My wife got laid off and took a early withdrawl but had our broker take out 10% to cover the tax penalty. Why do we still owe the 10% penalty?
    0 Votes

    • 35x35
      Mar, 2011
      Bill
      A person who takes a distribution on a 401(k) pays one 10% penalty tax. The amount of the distribution is taxable at the taxpayer's rate. In other words, if your income was $20,000, and you took a $15,000 distribution, you would pay at the $35,000 rate. See IRS Publication 575 to learn more.
      0 Votes

  • 35x35
    Feb, 2011
    Sam
    What medical expenses are approved for the early withdrawal tax to be reduced?
    0 Votes

  • 35x35
    Jan, 2011
    joey
    i am 55 years old. it seems like my marriage might be over. whether it will be a divorce or seperation has not been decided. currently i am on social security disability that goes back originally 3 1/2 years ago. my question is will i be subject to a penalty if i withdrawal all of my 401k, and what would be my tax bracket for my 401k?
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      You should speak to the 401(k) plan administrator. Ask if you are eligible for a a penalty-free withdrawal, consistent with Section 72(t) of the Internal Revenue Code. With this, you pay applicable income taxes but not the 10% early withdrawal penalty. One of the reasons that the IRS specifies that someone would not pay the 10% penalty is if you become totally disabled. Speak to the plan administrator about whether your disability meets the standards that would exempt you from the 10%v penalty.

      Your tax bracket is based on the total taxable income you earn in a year, including any money that you withdraw from your 401(k) plan. Without knowing your income level, I can't tell you what tax bracket you are in.

      Here are the federal tax brackets for the 2010 return:
      2010 Federal Tax Brackets
      Tax Bracket Single Married Filing Jointly
      10% $0-$8,375 $0-$16,750
      15% $8,375-$34,000 $16,750-$68,000
      25% $34,000-$82,400 $68,000-$137,300
      28% $82,400-$171,850 $137,300-$209,250
      33% $171,850-$373,650 $209,250-$373,650
      35% $373,650+ $373,650+
      0 Votes

    • 35x35
      Feb, 2011
      Mary
      Hi, earlier this year I cashed out my 235b plan. I took half to pay bills, and half was rolled over into an IRA account I opened with a bank. I paid 30% upfront (20%=the mandatory federal tax withholdings, and 10% for the early withdrawal penalty.) The full amount/total of withheld taxes/early withdrawal penalty show up in one lump sum on my 1099-R form under "Federal income tax withheld" I use an online tax filing site (I usually just have my income to file) and am trying to avoid paying out the nose for a professional. I'm a bit concerned however that the IRS is going to hunt me down for their 10% penalty later on, even though I already paid. Will this amount automatically "show up" to them as paid in full? It's been taken out already, but nothing reflects this on the forms or site, and when I entered that 1099-R form, it took me to a page saying that I would owe 10% penalty on the gross amount unless I enter exceptions. However, everything checks out as if I don't, and I even seem to be getting a bit of extra money back. I think everything checks out, but I just wanted to double check that there wasn't somewhere specific that the info should appear or where I should type it in, or that the IRS won't try and bill me separately for the penalty fee. Thanks in advance for any help you can give me!
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      Mary, I believe that you did things properly. All the monies that were withheld, whether from your income or from the retirement account disbursement, were sent to the IRS and credited to you.

      It is correct that all the withholding listed on the 1099-R shows in one box. On the site that you are using, there should be a place for you to enter a distribution code of "1" which indicates that you were penalized.

      I don't think that you have anything to be worried about, but you may not have peace of mind unless you have a professional review your return. If you do make an error, it can take the IRS years to catch it. If that happens, they tack on years of interest and penalty to any debt that say you owe.
      0 Votes

    • 35x35
      Feb, 2011
      Mary
      Hi, thanks for the fast response! I had one more question. I live in Pennsylvania. Would you know if the aforementioned distribution is state taxable and would I need to file this on my state return? If so, how do I determine what the "Total Federal amount" and "PA taxable compensation" dollar amounts would be? Thanks again!
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      I would be doing you a disservice by offering a thought on how to complete your Pennsylvania state tax return. Consult with a tax preparer who has experience with Pennsylvania state tax returns for the answer to your question.
      0 Votes

    • 35x35
      Feb, 2011
      John
      I just got laid off from my job and I owed about 5500 on my 401k.I now have about $27000 left as a balance.When I tried to withdraw the money online it warned me that I would be taxed about $6500 from the 27000+5500 that I owe.After all deductions I would be getting about $20200.However when I do the math, I am getting taxed only 20% instead of the 20+10% penalty and I am only 28 years old.Thanks
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      Talk to your former employer's 401(k) administrator about the math it is using to calculate taxes on distributions.
      0 Votes

  • 35x35
    Jan, 2011
    Ryan
    I am suffering through financial hardship due to personal reasons unrelated to anything that will exepmt me from the fees of early withdrawal from my 401k. I recently took out a loan from it but it has not been enough. I need to withdraw all of the money regardless of the fees I have not been contributing for a long period of time. After taking 4 grand out for a loan i have a little over 6,000 left. I called the company incharge of my 401k. I asked to withdraw the rest of the money regardless of fees and i was denied. From what i have read on this site people have withdrawn and paid the fees why wont this company allow me?
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      I can only speculate as to the reason why you were denied a distribution request. The 401(k) distribution rules discussed here are guidelines set by Congress. Congress allows employers to set tighter rules for their own plans. Consult with the plan administrator to learn your plan's rules.
      0 Votes

  • 35x35
    Jan, 2011
    Taylor
    I was terminated in May 2010 due to attendance (due to a medical condition- work at will state & couldn't qualify for further FMLA). The only options were to withdraw or keep the 401(k)at a fee I couldn't afford. I withdrew the money and it was utilized for on going medical costs, as well as other bills & debts as I'm still unemployed and filed for disability by the end of 2010. Can I claim the portion applicable to medical, and the rest as disability?
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      I don't fully understand what you are asking. Only medical expenses that are greater than 7.5% of the taxpayer's adjusted gross income are deductible in the income tax calculation. I strongly recommend that you speak with an experienced tax professional. Even if you normally do your own returns, you should seek professional assistance this year. If you make an error in good faith on your tax return, you are the one responsible for any debt that arises due to your mistake, along with the penalties and interest that accrue.
      0 Votes

  • 35x35
    Jan, 2011
    Tammie
    I currently am losing my job. Age 45 and my 401K is worth about $55,000.00. Will need to cash the entire amount in to make ends meet as my husband is still gainfully employed but work is very slow and his 401(k) is worth a heck of a lot more than my piddly 401(k). I understand that there will be a 10% penalty, plus state and federal taxes to be withdrawn. Then I am assuming I have to claim the entire $55,000 on my taxes which may throw me into a higher tax bracket. So, if my plan adminstrator pays the 10% penalty and DOES take the state and Federal taxes out of the check, I guess I am looking at about $30,000 net profit. Am I guessing correctly that when I file my taxes for the year, that I would not be looking at a substantial tax bill since the 10% and the state and federal tax were already taken out? I know it may throw me into the 28% tax bracket instead of the current 25% tax bracket that we are in, but I think that it may be a manageable tax to pay after I file taxes or there may be no tax liability at all as we usually are due a refund. Help?????
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      I think your assumptions are accurate. I believe that you will end up with about 60% of what you withdraw, paying the rest in taxes and penalties. IF your plan administrator withholds adequately for your 10% penalty and for your state and federal obligations, then you should not have a large tax bill. I suggest that you prepare a 'dummy' return, so you can calculate your total projected tax obligation. Then, make sure that the plan administrator withholds enough.
      0 Votes

    • 35x35
      Jan, 2011
      DAVID
      Bill I didn't work in 2010. So I'm thinking about taking my full distribution of $100,000.00. I will be taxed both fed and state plus 10% because I don't fall into any exceptions. My question is should I have taken the distribution in December 2010 instead of January 2011? What if I do gain employment this year then it will throw me into higher tax bracket. I would like to claim the amount on my 2010. Is it to late or I'm I stuck with claiming it on the 2011 taxes?.
      0 Votes

    • 35x35
      Jan, 2011
      Bill
      David, you are required to claim any disbursement from your retirement account as income for the year in which the disbursement took place. It may have made good sense to withdraw a portion of your funds in 2010, as you did not have other income for the year, but that ship has sailed. At this point, you should consider whether you need all of the funds in 2011 or if you can withdraw some in 2011 and some in 2012.
      0 Votes

    • 35x35
      Jan, 2011
      DAVID
      Good info - thanks
      0 Votes

  • 35x35
    Jan, 2011
    sandy
    want to take 7000.00 out of 401 am not of age would like to know besides 10% penatly what would be my federal and state tax.I live in Wisconsin
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      Sandy, the size of your state and federal tax obligations on the money you withdrew from your 401(k) will be determined by your income tax bracket.
      0 Votes

  • 35x35
    Jan, 2011
    Jason
    Three quick questions :-) 1) Does the additional 10% penalty apply to the entire amount of an early distribution or just the earnings of such (ie total withdrawl minus cost basis - or the amount contributed)? 2) Is there any affect to the 10% rule related to distributions taken only from monies rolled-over from a previous employer's plan into a current employer's plan? 3) How does one declare that the monies taken in the form of an early withdrawl were used toward the purchase of one's primary residence? (and does the 'not owned a home during the prior two years' rule still apply in this case?) Thanks!
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      Jason, in order to qualify for a penalty-free withdrawal, you meet one of the following exceptions:
      • You become totally disabled.
      • You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
      • You are required by court order to give the money to your divorced spouse, a child, or a dependent.
      • You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
      • You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59½, whichever is longer.)

      Because none of the above seem to apply, I believe that you will be subject to the 10% penalty tax. The penalty tax applies to the amount of the distribution, and not the amount of the original principal, gains, etc. Also, the penalty tax is due regardless if all or a portion of the distribution came from an employee's contribution, a rollover, employer's contribution, etc. Speak with your 401(k) plan's administrator and with a tax professional of your choosing, to learn detailed answers to your questions.

      0 Votes

  • 35x35
    Dec, 2010
    Ed
    Great info.
    0 Votes

  • 35x35
    Nov, 2010
    Kulbir
    I have withdrawal $60K from my 401K & Traditional IRA account to buy a primary residence. Do I have to pay 10% penalties on all 60K or penalty on 50K (Less 10K)?. Is there any way I can avoid penalty and taxes. Even i am interesting to put some money in 401K account. Please give me some guidance.
    0 Votes

    • 35x35
      Nov, 2010
      Bill
      If you use a distribution from a 401(k) or IRA to buy or build your primary home, then you are not subject to the 10% penalty tax. The distributions are subject to your income taxes. If you use less than the $60,000 you mentioned to buy the home, be sure to either return it to your retirement accounts or roll them into an IRA.
      0 Votes

  • 35x35
    Oct, 2010
    Jim
    I am 64 years old and purchasing a permanent residence. I would like to either borrow against my 401(k) or make a penalty free withdraw funds under Section 72(t). This year our family earnings will be much higher than normal so I'm looking for a strategy to minimize federal income taxes. Next year our income will drop significantly.
    0 Votes

    • 35x35
      Oct, 2010
      Bill
      The tax advice you seek is tricky for a correspondent like me to answer because my window into your financial situation is tiny. Income averaging may be a option for you. Consult with a tax professional to learn if it is.
      0 Votes

  • 35x35
    Oct, 2010
    Bill
    Withdrawing money from your 401(k) account in order to capitalize a business, does not meet the IRS rules for a hardship withdrawal. If you are under 59½, you will be subject to the 10% penalty.
    0 Votes

  • 35x35
    Oct, 2010
    Mode
    Hi if I take out my 401k use for open a small business do I get to pay tax penalty? I find this company they do creat a new comany name with new account transfer that 401k to new comany account is this true thanks
    0 Votes

  • 35x35
    Oct, 2010
    Bill
    Based on the context of your question, my answer assumes you received a distribution from your 401(k) account. If so, your administrator withheld enough to cover the federal 10% penalty tax. Regarding the rest of the taxes you need to pay, you can pay those when you file your 1040 for this tax year. Regarding the maintenance fee and sales charge, I cannot comment on that without reading the 401(k) contract you had or have with your employer. Your administrator will be able to answer your question about that, as well as why the sales fees are not appearing on your statement.
    0 Votes

  • 35x35
    Oct, 2010
    Adam
    I am 28 and cashed out my mutual fund yesterday (value of $5,472.03). I withheld 10% for federal taxes and 5% for state taxes. Is this enough? What I have read so far says that I should have withheld 20% for federal taxes, is this correct? If so, will I just pay more come tax time? It also looks like I was charged a $15.00 maintenance fee and $158.17 sales charge. Does this sound right? Finally, I do not see the 10% fee for getting out early listed anywhere on my online statement. Am I missing something? Thanks so much!
    0 Votes

  • 35x35
    Oct, 2010
    Bill
    Tax questions are always tricky because I never have enough information about the reader's financial situation and history to offer a helpful observation. The IRS assumes the distribution was subject to the 10% penalty tax. Consult with a tax attorney or experienced tax professional who will review your tax returns and financial situation. He or she will be able to give you precise advice on how to proceed.
    0 Votes

  • 35x35
    Oct, 2010
    anne
    Me again, sorry about the confusion. My husband was not 59-1/2 when we took the monies out of the 401k. The taxes were taken out of the distribution by the fund administrator. However, we did use those funds to purchase our primary residence. We filed our income taxes and included the income from the distribution but we did not include the 10% additional penalty of $8,000.00. We do our own tax returns online. Since we did use the distribution to purchase our house and the fund administrator had already withheld the federal taxes, and we claimed the income on our return we thought we were doing the right thing. But now we have been contacted 2 years later by the IRS(how convenient for them) and advised we owe the $8,000.00 + penalties, now $10,000.00. So, my question is how do we now handle this problem. Should we just call the iRS and explain that we used the money to buy our house or should we attempt to get assistance from an attorney regarding this matter. We are frightened to death because we are just working people and do not have that kind of money, thus the reason we took the distribution. My husband had been working for the company for almost 25 years and we were concerned that if we had left the money in the 401k that we would have nothing if we waited another year for him to retire and purchase a house. That 401k was at almost $200,000.00 just 1 year prior to taking the distribution. So, we had already lost so much at that point we knew we had to move quickly and secure what little future for a home we had left. So we purchased our house. It just baffles me that our government has any right to any penalties regarding our personal savings to begin with. They already have their hands in our pockets and received their "cut" via the taxes. What are your suggestions as to talking to the IRS or immediately hiring a tax attorney?
    0 Votes

  • 35x35
    Oct, 2010
    Bill
    I am somewhat confused by your question, and there is a crucial piece of information you did not include in your question. I will assume when you wrote, "We obviously paid the Federal Income tax on the withdrawal..." you asked the 401(k) administrator to withhold an appropriate amount from the distribution, but not the 10% penalty tax. When you wrote, "...however, we did not claim the withdrawal on our return..." you mean you did not file a Form 5329 with your 1040 that disclosed the 401(k) distribution. You mentioned the IRS is asking for the 10% penalty tax. If your spouse was less than age 59½ at the time of the distribution, then you are subject to the penalty tax. If your spouse is older than 59½ then you should consider filing an amended return with a 5329 to disclose this fact to the IRS. Regardless, consult with a tax professional regarding your situation. He or she will be able to review your tax return in detail, study the IRS letter, interview you both to learn the relevant facts, and give you specific advice without resorting to guessing, which is what I am doing here.
    0 Votes

  • 35x35
    Oct, 2010
    Anne
    We took my husband's early withdrawal to purchase a home. We obviously paid the Federal Income tax on the withdrawal however, we did not claim the withdrawal on our return because we did pu8rchase the house with the monies. We have received a letter from the IRS stating that they want the 10% + interest. What do we do now?? We haven't contacted them yet and would appreciate some insight as to what to expect from them when we do contact them.
    0 Votes

  • 35x35
    Oct, 2010
    Bill
    I can see no language to indicate the separation from service at age 55 must be from (in this case) Employer 1. IRS Publication 575 has no indication the account must be from the most recent employer. Call the IRS at (800) 829-1040 pose your scenario to the customer service representative, and learn if my guess is accurate.
    0 Votes

  • 35x35
    Oct, 2010
    Jeanne
    My husband left the employ of his company 5 years ago, leaving his 401(k) with Vanguard where it had been set up originally. Over the next three years he did consulting work for various clients, returning to full time employment (with a different employer)a couple of years ago. This year he was terminated when the company was sold, and has been unable to find another job, necessitating that we close out the 401(k) (from employer #1) to pay our bills. He is also turned 55 this year (the year he was terminated by employer #2). Can he use the "separation from service in the year of turning 55" exception to avoid the 10% penalty on this early withdrawal?
    0 Votes

  • 35x35
    Oct, 2010
    Bill
    If you are less than age 59½ and did not qualify for a hardship distribution, my guess is the 401(k) administrator withheld the 10% penalty tax plus another 10% so that you will face a smaller tax bill come April 15. You may have noticed I used the word "guess" in my answer. The best person to ask this question is your 401(k) administrator.
    0 Votes

  • 35x35
    Oct, 2010
    Liz
    I withdrew from my 401K. My employer already took 20% off. Do they take that much so hopefully you wont have to pay more at tax time?
    1 Votes

  • 35x35
    Aug, 2010
    Bill
    I avoid answering these types of questions because I never know enough about the reader's tax situation. Take the returns from your last two tax years to a tax professional who will review your entire financial situation and can offer a precise number for withholding.
    0 Votes

  • 35x35
    Aug, 2010
    Mickey
    My wife and I just withdrew her old employer'ed 401k at $16,000.00 They took 20% right off the top (stated as federal tax). In Utah, the income tax is no greater than 6.98%, so with a worst case scenario how much should we hold onto until next years returns are filed? Both claim 0 exemptions, 68k a year (joint), minimal deductions (house). I'm also confused as to where the 10% penalty is or when is it coming? I know you can't give an exact estimate.. but worst case scenario on 16k with a Utah tax of 7%, hold onto? Thanks for your help - this page has been most informative!
    0 Votes

  • 35x35
    Jun, 2010
    Bill
    No. There is no penalty to receive a distribution if the former employee is age 59½ or older. If the employee was less than 59½ then there is a 10% penalty tax. I am guessing that the 401(k) administrator is trying to do the employee a favor by withholding 20% for federal income taxes. This withholding is not a penalty, and is not mandatory.
    0 Votes

  • 35x35
    Jun, 2010
    Lissa
    my father in law has a 401 k which he would like to withdraw. He is over 60yrs of age, his work has been terminated, went from unemployment to receiving disability. On trying to receive all of his monies from his 401k, the complany (401 k) people had told him there would be a 20% penalty. would that be true?
    0 Votes

  • 35x35
    May, 2010
    Bill
    Were the distributions due to an immediate and heavy financial need? See the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules, and specifically look for the section on "hardship distributions."
    0 Votes

  • 35x35
    May, 2010
    Shaun
    My wife lost her full time position a year ago and has only been working part time for the past 5 months, in order to keep from missing payments (mortgage, credit card etc.) we have been withdrawing from my 401k. would these be considered hardship withdrawals or do we still owe the 10%?
    0 Votes

  • 35x35
    May, 2010
    Bill
    In general, I like your idea. However, the devil is in the details. Does your plan allow you to start payments in the indeterminate future? If so, a loan is superior to a distribution. One other thought: If you are experiencing a hardship, you may be able to take a distribution without the 10% penalty tax. See the IRS Web page I referenced in earlier replies to see if your situation qualifies as an immediate and heavy financial need.
    0 Votes

  • 35x35
    May, 2010
    Kayla
    I lost my job last year and still remain unemployed. We are experiencing financial hardship such as making ends meet. Instead of withdrawing my money in 401, can I borrow the money instead to avoid the penalty? Then pay it back when once I am back to the workforce before rolling it over.
    0 Votes

  • 35x35
    Apr, 2010
    Bill
    What you are really asking is if 19% of your gross income for medical expenses is a hardship. A hardship is an immediate and heavy financial need. "Whether an employee has an immediate and heavy financial need is to be determined based on all relevant facts and circumstances." See the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules, and specifically look for the section on "hardship distributions."
    0 Votes

  • 35x35
    Apr, 2010
    Tobin
    Need some advice please. Unemployed all of 2009, married filing jointly, early distribution from IRA $16,500, medical expenses $3,150 or 19% of gross income, additional insurance premiums $828. Tax liability are still calculated to be over $1,200 using form 5329. Shouldn't the 19% medical expenses meet the criteria to exclude me from the penalty? Thank you.
    0 Votes

  • 35x35
    Apr, 2010
    Bill
    Because you are older than 59½ you can receive a distribution from your 401(k) without paying the 10% penalty tax. See the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules to learn more.
    0 Votes

  • 35x35
    Apr, 2010
    LindaL
    My husband and I are both 61, employed full time. In 2009 we sold some stock originally purchased through an ESPP that was losing value. We used the proceeds to put a roof on our house and fill in an inground pool. Adding the proceeds to our income has us now owing almost $8000 for 2009. Can we withdraw from a 401K for the funds to pay the taxes?
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    I am confused why you would intermingle after-tax money in a 401(k), which is by definition a before-tax retirement savings plan. Perhaps your account is a Roth IRA. I am also curious why you "don't need to pay the 20% tax anymore" and what that 20% tax is. Is that your tax rate? I am reluctant to offer an observation because I am uncertain what tax plan you have, and you do not mention your age, which is very significant. Therefore, I will refer you to the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules and not comment further.
    0 Votes

  • 35x35
    Mar, 2010
    Day
    I have about $34,000.00 "after tax" contribution in my 401K and would like to withdaw it. Is there a 10% penalty on this too? I know I don't need to pay the 20% tax anymore. I will be using the money for dental purposes. I need to replace an old bridges and crowns (8 units) and I would like to have a dental implant.Is this consider as "hardship"withdrawal ? Please advise.
    0 Votes

  • 35x35
    Mar, 2010
    Judy
    I just went back to work in december from being off for the year do to a disablity. My husband has been of of work for a year and on unemployment. Would he be able to take his pention money out to help us with bills and still get unemployment? If we dont do something we will loose our home. Any light you can shine on this subject would be great. thank you.
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    I have two assignments for you: First, contact the state agency that distributes unemployment benefits and ask a service representative if receiving a 401(k) distribution is income you need to report in your weekly unemployment claim form. Second, see the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules to see if you qualify for a hardship distribution.
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    Yes, you will need to report the distribution on your federal income taxes, and state taxes if your state has an income tax. See the IRS documents 401(k) Resource Guide - Plan Participants - General Distribution Rules and Instructions for Forms 1099-R and 5498 for more information.
    0 Votes

  • 35x35
    Mar, 2010
    Boyd
    If I cashed out my 401 K early, took the 10% penalty and the additional 20% federal tax up front, do I still need to report this on my 2009 taxes?
    0 Votes

  • 35x35
    Mar, 2010
    Bill
    The fact that you are disabled may exempt you from the 10% penalty tax for receiving a distribution from your 401(k) before age 59½. However, your disability does not exempt you from state or federal income tax. The 401(k) distribution is income the year you received it. See 401(k) Resource Guide - Plan Participants - General Distribution Rules for more about 401(k) distribution rules. Your being a victim of a crime does not exempt you from income tax.
    0 Votes

  • 35x35
    Mar, 2010
    Holly
    I was declared disabledby my physician in 1984 at 40years 0f age. Social Security declared me 100% disabled in 1997. I 1997 I accessed part of my 401k after my ex-husband assaulted me and cleared out our financial accounts.I used the money yo support myself and my children. I have just recieved a letter from the IRS stated I owed the taxes on the 401k withdrawl. Since I was was totally disabled and then had to access my 401k to support my children and get them to safety, should it be tax exempt? I have been trying to clear this up with the IRS for eight months and I get an answer everytime. Thank you.
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    I urge you to take your tax records to a professional tax preparer who can review your financial situation in its entirety and advise you accordingly. Alternatively, try one of the free online tax preparation Web sites.
    0 Votes

  • 35x35
    Feb, 2010
    Diana
    Hi, I cashed in most of my teacher retirement funds because I was laid off. It totally about 15,000. Of course, I didn't see that amount-quite a bit less, which I assumed was the penalties? Then, I paid the taxes on them, so in the end, I really screwed up. I was told, however, this year I could claim those penalities or fines on my taxes; is that correct? Do you know what I am talking about? I have not received anything stating the exact charges incurred by the retirement fund; wouldn't I need that informaiton to claim this if it is a claim? If this is a complete falsehood, is there any break I can look for? I have a full-time student, not working, living at home which I support, but I am on unemployment.Showing a large amt. of "income" last year hurt my daughter's financial aid, and it looks like I had another 5,000 from a IRA cashed in after taxes last year (I truly cannot remember it), so my income looks bigger again. Any suggestions appreciated! Thank you.
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    If the administrator processed the distribution as a hardship, then your spouse was not charged the 10% penalty tax. If your spouse, in fact, used the distribution to pay the medical bills then you should not pay the 10% penalty tax voluntarily, either. However, I hasten to say this is my guess based on your comment only. See IRS Form 5329 instructions for additional information. In general, 401(k) distributions are subject to the taxpayer's income tax at the tax rate appropriate. In other words, a distribution is income. Your spouse's 1099-R is the key document, and you would be wise to review the IRS instructions for Forms 1099-R and 5498. The fact that you used all or a portion of the distribution for medical bills does not allow you to waive your taxes automatically. You would account for your medical expenses and other deductions in your Schedule A.
    0 Votes

  • 35x35
    Feb, 2010
    Kasey
    Re: last message from Kasey: We just simply asked for the lump sum after my husband didn't work for the company for 90 days. We knew we wanted to pay the hospital bills we were left with of $26000. We knew the penalty's. We just didn't know that it was possible to get a portion of the distribution of $38,000 penalty free if we used it to pay the medical bills. Not sure that we can. That is what I am asking. We received the money late in 2009, and now that I am doing the taxes CAN we waive the portion being used for medical bills that equates over 7.5% of our agi? Only 20% was taken from the lump sum given to us, not the 10% penalty.
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    There are too many facts lacking in your message for me to offer an observation. Was the 401(k) distribution a hardship distribution? How much was distributed and does the amount correspond to the cost of the surgeries? Was the penalty tax taken from the distribution?
    0 Votes

  • 35x35
    Feb, 2010
    Kasey
    My husband was able to easily request a complete lump sum withdrawel from his 401k and we recieved it on Dec. 17 2009. My son had 2 operations in 2009 and our out of pocket expenses (not paid yet) was $26,000. This is our only way of paying the expenses. With our agi of $154,000 are we entiled to take the amount 7.5% (11,550)that is over our income penalty free? Math = $26,000 - 11,550 = $14,450 that would be the amount of the $38,000 we recieved that WOULD be penalty free. The reminder would be penalized at 10%?? We did not establish that when we took the withdraw, does that matter?
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    Impossible to say yes or no given the scarcity of facts provided. See the IRS documents 401(k) Resource Guide - Plan Participants - General Distribution Rules and Instructions for Forms 1099-R and 5498 for more information.
    0 Votes

  • 35x35
    Feb, 2010
    Mike
    Bill, I am in my late 30's and about 8 mos ago, I took out a hardship withdrawal from my 401k plan to make a down payment on a new house. This was the only way I could make the down payment, and all of the proceeds went into the purchase of the new house. This is my 2nd home, our 1st being purchased back in 1998. Only 10% federal tax was taken out of the proceeds. Is it possible I will owe more when filing my taxes?
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    If you are age 59½ or older, you do not need to pay the 10% penalty tax when taking a distribution, according to the guidelines Congress set for 401(k) plans. However, these are guidelines, and employers are free to create more stringent rules for distributions. See 401(k) Resource Guide - Plan Participants - General Distribution Rules and Instructions for Forms 1099-R and 5498 for more information.
    0 Votes

  • 35x35
    Feb, 2010
    Teresa
    I am 63 years of age and I took some money out of my 401-K for medical reasons. Do I still have to pay the 10% interest fee for taking money out early? What form do I use to avoid paying the penalty? I want a reply. Thank you for your help.
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    Ed: Impossible for me to say with the amount of information you shared. See the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules and the Form 5329 instructions.
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    Heather: Contact your 401(k) administrator immediately about the error so than an amended 1099-R can be created and sent to you and the IRS.
    0 Votes

  • 35x35
    Jan, 2010
    ed
    I'm 58 and withdrew $6000.00 from my 401k to purchase a first time home...what will my taxes be on that amount?
    0 Votes

  • 35x35
    Jan, 2010
    Heather
    I took out money from my 401k when I rolled my 401k over in to an IRA when I lost my job. I paid my taxes and penalty when I took out the money. When I got my 1009r it just shows the amount I took out. It doesn't show any taxed being paid on it. Is this correct? It only has the gross distribution filled out. I thought is would show that taxes I paid on it.
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    Leave the 401(k)alone and continue to make contributions to it. A 401(k) consists of pre-tax earnings that you will pay taxes on in the future after retirement when (presumably) you will be earning a smaller income and will be in a lower tax bracket. Look into a 529 savings plan.
    0 Votes

  • 35x35
    Jan, 2010
    Per
    Bill, I have a 401k with my current employer that has reached about 80k. I've been doing some research on a college savings plan for my 1-year-old and I've curious if rolling my 401k into a Roth IRA makes sense or if I should just leave it in the 401k plan. I'm 34 and have about 30 years to let this plan or the Roth grow. I believe the Roth grows tax-free while the 401k will be taxable at distribution. The Roth would also allow me to take certain distributions. Is this correct/allowed/smart?
    0 Votes

  • 35x35
    Jan, 2010
    ann
    I borrowed $18,000. from my 401k plan 9/2009 to pay off some over due medical bills and to help get by when my husband was let go from work (the company that we both work for was sold). My last day of work is this Friday. I still owe $16,000. Can I still make payments on this loan or will it be treated as a withdral? Would I pay the taxes in this for 2009 or 2010 (last withholding from paycheck will be 1/25/10). I am 44. We file jointly. thank you
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    The facts in your message confuse me. If you receive a "loan" from your 401(k), then you are not required to pay the 10% penalty tax nor would you receive a 1099-R. However, if you receive a hardship distribution because of an immediate and heavy financial need then you will pay a 10% penalty tax, receive a 1099-R, and be required to show the amount of the distribution on your 1040 for the 2009 tax year. If you received a hardship distribution, then it appears your 401(k) plan administrator withheld the 10% penalty tax plus another 10% to cover your estimated income tax on the distribution. See 401(k) Resource Guide - Plan Participants - General Distribution Rules and Instructions for Forms 1099-R and 5498.
    0 Votes

  • 35x35
    Jan, 2010
    Liz
    I took out a hardship loan of $10,000. I paid the penalty fee along with the other taxes and ended up with $8000. My question is (and I should have figured this out earlier) do I need to pay more taxes when I file the 1099 form? It seems like I already paid that and the penalty...
    0 Votes

  • 35x35
    Dec, 2009
    Bill
    I found the following advice on the FTC Web site that you might useful:
    1. Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A local community-based organization may make small business loans to people. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.
    2. Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and all consumers in some states and the District of Columbia have some protections dealing with limits on rates. Even with these protections, payday loans can be expensive, particularly if you roll-over the loan and are responsible for paying additional fees. Other credit offers may come with lower rates and costs.
    3. Contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service - a late charge, an additional finance charge, or a higher interest rate.
    4. Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.
    5. Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, every-day items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan - however modest - can help you avoid borrowing for emergencies. Saving the fee on a $300 payday loan for six months, for example, can help you create a buffer against financial emergencies.
    6. Find out if you have - or if your bank will offer you - overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection can help protect you from further credit problems. Find out the terms of the overdraft protection available to you - both what it costs and what it covers. Some banks offer "bounce protection," which may cover individual overdrafts from checks or electronic withdrawals, generally for a fee. It can be costly, and may not guarantee that the bank automatically will pay the overdraft.
    0 Votes

  • 35x35
    Dec, 2009
    Bruce
    Im 24 years old and got myself in a situation. Im in need of some money fast soo I dont get evicted from my apartment and to pay off some dept and start a "new" life in 2010. What do you suggest??
    0 Votes

  • 35x35
    Dec, 2009
    Bill
    First, read 401(k) Resource Guide - Plan Participants - General Distribution Rules to understand the guidelines Congress set for 401(k) accounts. Second, I cannot understand why you were told to wait until December of this year to take a distribution. January would make more sense because it is a new tax year and if you are still unemployed you will need to withhold less than in 2009. I would suggest against taking a distribution if you can survive without it due to the 10% penalty tax you must pay. If you afford it, it would make more sense for you to roll-over the $7,800 into an IRA.
    0 Votes

  • 35x35
    Dec, 2009
    GREGORY
    Hi, got fired from my job 4 months ago have about 7800.00 in my 401k, im 58 and one half years old, i was told by ly company administrator to wait until end of dec 09 how much taxes will be tax on that amount, i was told about 40 percent for the withdrawl is that true. thank you greg
    0 Votes

  • 35x35
    Dec, 2009
    Bill
    Ann: No, I know of no manner of claiming a capital gains loss on a 401(k). Readers, if you know of a means making this claim, please respond below.
    0 Votes

  • 35x35
    Dec, 2009
    Bill
    Terry: Yes, you will pay a 10% penalty tax if you receive a distribution under these circumstances. Consider instead a rollover into an IRA, which avoids the penalty.
    0 Votes

  • 35x35
    Dec, 2009
    terry
    I am 55 years old, I have been working for a company for 17 years. We were just notified that as of jan. 1 2010 our 401k will be disolved. My question is, will I have to pay a stiff penelty for early withdrawl even though the company disolved our 401? I have 37k in the plan.
    0 Votes

  • 35x35
    Dec, 2009
    ann
    if i withdrew from 401k for downpaymnet on a first time residence, and I already paid the 10% upfront, BUT my 401k took substantial losses last year, is there any avenue to deduct investment loss?
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    Talk with your 401(k) administrator about your plans for the loan. If you have the funds or cash-flow to repay the loan then I suggest you do so for the reasons I am about to outline. If you cannot repay the loan, then the loan will be treated as a distribution at the time the loan amount was given to you. If you were younger than 59.5 at the time of the loan/distribution, you will pay the 10% penalty tax plus whatever your withholding rate is for that tax year.
    0 Votes

  • 35x35
    Dec, 2009
    Bill
    I suggest you read the "hardship distributions" section of the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules. Generally speaking, the surgery you mentioned is performed for cosmetic reasons but in your case it sounds like there are health reasons behind your interest in the procedure. If the procedure is medically necessary and you have no other resources available to pay for the procedure, you may be able to convince your 401(k) administrator to give you a hardship distribution. I would stick to the medical diagnosis from your doctors, and use the medical description of the surgery when discussing the procedure with the administrator. In my opinion, you will lose the administrator's support and willingness to provide a hardship distribution if you utter the phrase "tummy tuck" given the procedure's frequent use for cosmetic purposes. Two additional thoughts: Congress set up guidelines for 401(k) accounts, and gave employers the ability to create stringent rules for distributions. Also, you may want to consider a loan against your 401(k) instead of a hardship distribution.
    0 Votes

  • 35x35
    Dec, 2009
    Lori
    Hi, I’m 46 I had gastric bypass surgery and have lost 100lbs. I need a tummy tuck to remove sagging skin on my stomach. This surgery is not cover by my medical insurance however, I need it to resolve some comfort issues and skin problems. Can this type of surgery be considered a financial hardship withdrawal.
    0 Votes

  • 35x35
    Dec, 2009
    Bill
    You are asking for Information About Rollovers. See the IRS document Retirement Plans FAQs relating to Waivers of the 60-Day Rollover Requirement for information on how to obtain a waiver for the 60-day rule.
    0 Votes

  • 35x35
    Dec, 2009
    Phillip
    Hi I'm 27 and I got laid off from my old job. When I found a new job I tried to do a rollover from my old 401k(ADP) to my new one(Expert Plan) however somehow I/they messed up and I ended up with a termination check made out to me in September for about 10k pretax (7k after). Trying to setup an IRA I was informed that since I didn't make the deposit within 60 days I'm basically responsible for a penalty. What are my options and thanks for the great advice.
    0 Votes

  • 35x35
    Nov, 2009
    Bill
    First, read the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules to understand the general guidelines Congress put in place for distributions. Second, instead of accepting a distribution of all of the funds from your 401(k) consider a 401(k) loan. Finally, if you really do want to receive a distribution of your entire balance, contact the administrator for your 401(k) plan. He or she will provide the necessary forms you need to complete.
    0 Votes

  • 35x35
    Nov, 2009
    debbie
    I need to with draw all of my money from my 401K account.. How do I do this?
    0 Votes

  • 35x35
    Nov, 2009
    Curtis
    I have closed my 401k and taken an early withdrawal for the total amount. I was 43 years old at the time. I realize the tax burden. I would like to know how to qualify for the the disability provision for penalty exception. My plan administrator says that they do not make the determination. I talked with the IRS and they don't either. Do I just submit a revised 1099 then I get it and hope that they consider the circumstances? Basically, I was diagnosed with cancer for the second time and have various other potentially qualifying conditions which may apply. Most of the direction that I have been given is based upon the Social Security definition of disability, however the criteria under the IRS is different. Any guidance would be helpful. Thanks.
    0 Votes

  • 35x35
    Nov, 2009
    Bill
    If you are thinking of receiving a small distribution, then your tax rate will be low, given your income.
    0 Votes

  • 35x35
    Nov, 2009
    bettie
    I am 61 1/2. My 401k is worth 12.000. My concern is the tax rate in the state of maryland as well as federal. I am a full-time employee working short hours. I've only earned around 16,000 so far this year.
    0 Votes

  • 35x35
    Nov, 2009
    Bill
    Thank your lucky stars you are able to get the entire balance of your retirement plan rolled into a Simple IRA. I do not see that a Simple IRA offers a tax advantage for you as compared to a defined contribution plan, but at least you will have complete control of the funds should your old employer cease operations or you disagree with the administrator's investment decisions. To the point of your question, I want you to consult with a tax planner or CPA in your state who will be able to review your entire situation. In that meeting, ask if given your unemployment and husband's income it makes sense for you to roll the balance of your retirement plan into a Roth IRA.
    0 Votes

  • 35x35
    Nov, 2009
    Diane
    I am a real estate paralegal and was laid off Oct. 31,2008 after 17.5 years with a real estate law firm. My yearly salary was around $55K. I am 58 years old and have approx. 277K in a Defined Contribution Plan (DCP). (I lost $107K in 2008) The employer contributed and has managed the plan. I have been on unemployment since Dec. 2008. I worked for another law firm June - September and now that it has slowed down in the real estate market, I have had to get my unemployment benefits reinstated. I have not been late on any payments regarding my 1st or 2nd mtg. My Husband works and his annual salary is approx. $32K and with the small amount of $330. a month from unemployment we are headed for disaster. I contacted the Administrator of DCP to get a loan to pay off my 2nd mtg. I wanted to borrow $32K from the DCP with a balloon payment due when I turned 59 1/2 or make payments monthly with hopes of getting the payments lower than the payments with the Bank. He indicated I could get as much as I wanted and he would withhold 20%. A couple of days later, he advised me that he was closing out the DCP effective the end of 2009 due to expenses of maintaining the plan and all of the changes in the tax laws. He wants to transfer the funds in my Simple IRA Schwab account which has a balance of $2,800. I do not know what to do. Can you give me any suggestions?
    0 Votes

  • 35x35
    Oct, 2009
    Bill
    According to IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules, "Generally, distributions of elective deferrals cannot be made until one of the following occurs... You reach age 59½ or incur a financial hardship." Congress set 401(k) rules as boundaries, and it would surprise me that a plan would be considered legal under the 401(k) rules if it allowed penalty-free distributions before age 59½, hardship rules not withstanding.
    0 Votes

  • 35x35
    Oct, 2009
    Ann
    I need clarification on leaving a company at 55 and avoiding the 10% penalty on a lump sum or any distribution of a 401k. Do you have to "attain" age 55 before you leave the company or do you avoid the 10% penalty if you leave in the year you turn 55? In December of 2010 will turn 55, if I leave in February of 2010 will I avoid the 10% penalty or not? Thanks
    0 Votes

  • 35x35
    Oct, 2009
    Bill
    Michelle, please see my response to Mark on this page above, dated September 8, 2009. It is important to note that when asking for a hardship distribution, it is not enough to say, "I have a hardship." That is conclusatory. You need to say to the administrator something like, "I am about to be evicted from my residence. Under the 401(k) distribution rules that allow distributions in hardship situations, a plan participant may receive a hardship distribution when he or she is facing eviction. Because I am facing an eviction if I do not receive a distribution, I qualify for receiving a distribution under the hardship rules." I agree that my wording is a bit awkward, but you get the idea -- you need to create an argument to the plan administrator that your circumstances fit the hardship rules, rather than stating you have a hardship. If your circumstances do fit the hardship rules, then the administrator may not withhold a 10% penalty tax when you receive the distribution.
    0 Votes

  • 35x35
    Oct, 2009
    Michelle
    I am 53 and quit my job for health reasons in April of 2008. I have been unable to find employment since. In April of 2009 when my savings ran out I liquidated a 10,000 balance on an old 401K which I hope to stretch for living expenses until the end of the year. I own no property (I rent) and that money is all that I have to live on. Can I claim the hardship withdrawal? When I spoke to the administrator's rep he said that I could claim it on my taxes.
    0 Votes

  • 35x35
    Sep, 2009
    Bill
    According to the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules (see link above), "Depending on the type of benefit distribution provided under your 401(k) plan, the plan may also require the consent of your spouse before making a distribution." I do not know under what circumstances a spouse's signature is required for a distribution. Your plan administrator will be able to answer that question for your particular plan, as can the administrator for your spouse's plan.
    0 Votes

  • 35x35
    Sep, 2009
    Debbie
    My husband was laid off from his job in January 2009 and withdraw all of his 401k. I thought that before a spouse could withdraw money from their 401k plan, that they needed the signature of the spouse. Where I work now I cannot withdraw any of my 401k without his signature. I live in North Carolina is there a law regarding this?
    0 Votes

  • 35x35
    Sep, 2009
    Bill
    According to 401(k) Resource Guide - Plan Participants - General Distribution Rules "If you receive a lump-sum distribution from a 401(k) plan and you were born before 1936, you may be able to elect optional methods of figuring the tax on the distribution. More information on the optional methods can be found in Publication 575, Pension and Annuity Income, and in the Form 4972 Instructions, Tax on Lump-Sum Distributions." You may elect to take a full distribution for a variety of reasons, including rolling your 401(k) into an IRA. Because I have an incomplete view of your financial picture, I recommend you work with a tax planner or financial adviser so that you achieve your financial goals while minimizing your taxes.
    0 Votes

  • 35x35
    Sep, 2009
    Louise
    I am a widow aged 78. Are there any restrictions on the amount of money in my 401K that I can withdraw- I know I will pay taxes on the amount withdrawn. I have appr. $69K in the account. I made one $5K withdarawal esarlier this year - can I withdraw additional funds or will I have to wait until next year? Louise
    0 Votes

  • 35x35
    Sep, 2009
    Bill
    According to IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules, a 401(k) plan may allow you to receive a hardship distribution because of an immediate and heavy financial need. According to the IRS document cited, a immediate and heavy financial need includes, "Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence." If, as you imply, your other resources are exhausted then you may be able to argue to your 401(k) administrator that your distribution request is for an immediate and heavy financial need. I doubt that any administrator would be cruel enough to require that you slip into foreclosure proceedings before allowing a distribution.
    0 Votes

  • 35x35
    Sep, 2009
    Mark
    Hi, (neither of us are over 59.5 years) As Realtors my wife and my incomes have been greatly reduced by the housing market. I have a 401K and my wife a SEP totaling about 200K. We have been borrowing to pay our mortgage and maintain our excellent credit rating. We are down to a need to tap either the 401K or SEP to avoid failure to keep current and probable foreclosure. We are current, however without the retirement money that will change fast. Is their anyway to use the foreclosure exemption to avoid the penalty, without actually devasting our credit or do we have to actually go through that process?
    0 Votes

  • 35x35
    Aug, 2009
    Bill
    Well Norma, I would not suggest handing out personal IOUs. California tried that and some banks did not accept them. Besides, I would not hold up the state government of California as a paragon of sound financial planning. However, if you do give your idea a try, let us know how it works out for you.
    0 Votes

  • 35x35
    Aug, 2009
    NORMA
    if i withdraw early to make ends meet can i repay the taxes and penalty in yearly payments just as california is and will send me an iou letter instead of my state returns?
    0 Votes

  • 35x35
    Aug, 2009
    Bill
    Impossible to answer with certainty without knowing more. If the debt is consumer debt, such as a car payment or credit cards, then the interest expense is likely significant. If that's the case then why line the pockets of your creditors? If the debt is a zero-interest car payment, then let the creditor eat the expense. If the debt is a mortgage, then you need to take your recent tax returns to a tax planner to find if your deduction on mortgage interest is significant enough to matter for your tax situation. My guess is that it doesn't, but my window into your financial situation is tiny.
    0 Votes

  • 35x35
    Aug, 2009
    dennis
    62 yrs old, gov. pensioner, part-time job disappearing and have 20 k in debt need to eliminate. $ 105,000 in IRA and 401. Whats the best approach, liquidate 20,000 pay taxes,( no penalty) or say withdraw $ 1000/ month less taxes and balance may grow a bit
    0 Votes

  • 35x35
    Aug, 2009
    Bill
    Impossible for anyone to answer without knowing more about the rest of your tax situation. Are you still earning an income? If you are married, your spouse's income is a factor, as well as your exemptions and deductions. Take your recent tax returns to a tax planner, who will be able to review your entire tax situation. See the IRS document 401(k) Resource Guide -- Plan Participants -- General Distribution Rules for more information.
    0 Votes

  • 35x35
    Aug, 2009
    Joseph
    I am 59 1/2 and recently withdrew all my money from my 401k. There was no penalty but 20% taxes was taken from the company's matched contributions. When I file my taxes will I need to pay any more taxes?
    0 Votes

  • 35x35
    Aug, 2009
    Bill
    I'm curious how you will pay-off a $4,000 balance on your credit card if you are unemployed. Regarding the 401(k), your employment status does not change the distribution rules. Depending on the specific requirements of your 401(k) plan, you may not be able to use an early distribution from your 401(k) to become an undocumented partial owner of a property. Think twice about such a deal -- what are your rights if your name is not on title? Let me express this another way, if you invest in a property, get your name on the title. Unemployment is not a financial hardship under the 401(k) distribution rules.
    1 Votes

  • 35x35
    Aug, 2009
    Christopher
    Hi there. I was laid off 3 months ago. Before that, I had taken out a personal loan from my 401k to help pay off credit card debt. I was paying it back slowly with automatic payments. I have a balance left of $4000+ which I plan (crossing fingers) being able to pay this off next month. If I wanted to "chip in" and become a part owner (not my name on paperwork) in a small house or condo-to live in- can I take out ANOTHER loan after I paid the previous loan back? If so, how long must I wait before I can receive it? If not, is it because Im currently not employed? Do I need to find a new job and/or/rollover the funds before I can take out a home loan? Also, if I take out a full early withdrawl, can I claim my unemployment as a financial hardship, and not be taxed the 10% extra? thanks in advace, Christopher
    0 Votes

  • 35x35
    Aug, 2009
    Amy
    I am 55 - just turned 55 in July - and I have been unemployed for close to 2 years now. Since I was not laid off in the year that I turned 55, does that mean I still must pay the 10% penalty fee?
    0 Votes

  • 35x35
    Jul, 2009
    Bill
    What you are asking about is called a distribution. "Almost 60 years old" is not precise enough for me to answer your question. A huge milestone occurs when a person with a 401(k) passes the age 59 1/2. See the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules for more information.
    0 Votes

  • 35x35
    Jul, 2009
    Bob
    Victim of the recession. Laid off 5 months ago due to lack of work. Reserves are used up now. I am almost 60 yrs. old and have $115k in a previous employer's 401k plan. Need money to cover monthly obligations including mortgage. What is my best option at this point? Future job prospects are not looking good at all!
    0 Votes

  • 35x35
    Aug, 2009
    Bill
    Generally, if you make a withdrawal before you are 59 & 1/2 years of age, then you are subject to an early withdrawal penalty. The only exception is if you qualify for a hardship based withdrawal as per the rules specified by the IRS.

    You will also need to talk to your plan administrator to provide them with information that explains your hardship.
    0 Votes

  • 35x35
    Jun, 2009
    Bill
    You would have to check that with your plan administrator.
    0 Votes

  • 35x35
    Jun, 2009
    Bill
    It is actually your responsibility to make sure that you pay all the taxes (Federal and State) on the amount that you withdrew. Every provider has different rules regarding withholding of taxes at the time of the withdrawal, I suggest you obtain a statement from your plan administrator and reconcile the tax payments once again.
    0 Votes

  • 35x35
    Jun, 2009
    JACK
    If I took a early withdrawl from my 401K/Profit Sharing and cashed the check and rolled over half to another retirement before 60 days Can I get a part of my money back from my 401K that I rolled over.
    0 Votes

  • 35x35
    Jun, 2009
    Debbie
    I left my job in 2000 to take care of my father who eventually died from a brain tumor. I withdrew my 401K (48yrs old) to live off of and take care of my daughters. I was penalized the 20% from federal along with paying the extra income tax, but did not realize my provider did not take the 20% penalty for the state taxes; I did report the income on my state taxes. In 2007 I was advised of this error by my state which included penalties and interest along with the initial amount due from 2000 to date. Is the provider at all liable for creating the additional debt by not taking out the 20% penalty at the time of disbursement? Thank you.
    0 Votes

  • 35x35
    May, 2009
    Bill
    Well they will not get the money if you wait till you retire, in order to withdraw the savings. The reason these savings are not taxed is that the Government is encouraging you to save more. Also, if you are going through a hardship, there are certain scenarios wherein the penalty could be waived.
    0 Votes

  • 35x35
    May, 2009
    jeff
    Who gets the money from all of those 10% penalties. The 401k fund, or the Federal Government? And isn't this a Bonanza for them?
    1 Votes

  • 35x35
    May, 2009
    Doris
    Generally speaking, after tax contributions to a 401k account are not subject to the 10% early withdrawal penalty, as they are not really part of your Roth 401(k) account, but treated in some sense as separate funds which you are having the plan administrator invest for you. Any earnings on these funds would be taxable, but I do not believe that the earnings would be subject to the penalty. Irecommend that you consult with your plan administrator for more details.
    0 Votes

  • 35x35
    May, 2009
    Bill
    I believe that this was one of the proposals put forth by President Obama but, we have not heard any confirmations that it has gone into effect. Please check with your plan administrator to confirm the same.
    0 Votes

  • 35x35
    May, 2009
    george
    I had heard that the government was going to waive the 10% penalty for early withdrawal from a 401K for this year as part of the Recovery and Act of 2009, but I have not seen anything official from the IRS, is this true.
    0 Votes

  • 35x35
    May, 2009
    Ben
    I have about 9K in a 401k that was contributed POST TAX. I am fully vested in the 401K but am confused about wether early withdrawl penalties apply to POST TAX contributions. I assume they do but am having a very hard time finding info the speaks directly too POST TAX Contributions to 401Ks. If I am subject to the 10% early withdrawl, will the 401k Mngmt company pull that out of the distribution or do I need to hold it back to pay at the end of the year? Thanks in advance and again all contributions from me were POST TAX.
    0 Votes

  • 35x35
    May, 2009
    Bill
    If you withdraw before you are 59 & 1/2 years old, you will have to pay 10% penalty on top of the regular income taxes that are due. You are not required to withdraw the whole amount.
    1 Votes

  • 35x35
    May, 2009
    aaron
    I know I dont qualify for any hardship loan on my 401k. Im only 21 and i have 6000 in my account is it possible to withdraw funds early. If it is possible do you have to withdraw the whole amount?
    0 Votes

  • 35x35
    Apr, 2009
    Bill
    You can withdraw the money in the 401k account, but you will not be able to transfer it to a Roth IRA if your company does not provide one. Keep in mind that your company may also have restrictions on the withdrawals, and if that is the case, then there is little you can do.
    0 Votes

  • 35x35
    Mar, 2009
    J.
    Bill, I appreciate the advice, but I want to move my 401(k) funds to a Roth IRA while still employed. We're willing to pay the penalty. As I mentioned before, my plan administrator says it isn't allowed because I still work there and I'm under 59 1/2. What can tell her so I can get my money out of my company's "qualified" plan?
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    Remember that you would have paid a 10% penalty for the amount withdrawn (early withdrawal penalty). This is on top of the regular income tax that you would pay once that amount is added to your yearly income total. If you wanted this withdrawal to be classified as a hardship based withdrawal, you should have made sure that you qualify with your plan administrator before you withdrew. You can read more about hardship based withdrawals here: http://www.irs.gov/retirement/article/0,,id=162416,00.html
    0 Votes

  • 35x35
    Mar, 2009
    Jean
    I lost my job in september and had to withdraw my 401k to make ends meet. I was not able to draw unemployment so this money went to pay bill including the mortage so i would not lose my home. the amout was approx 27k and they took 5524 for tax purposes. I am doing my taxes and it still says i owe more federal taxes in the same amount how can that be and also would i qualify for hardship because i was without income and needed this money to pay bills
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    A 401K is pre tax dollar contribution while a Roth IRA is post tax dollar contribution. If you are trying to use the 401K money to fund your Roth you will take a huge tax "hit" as you are under retirement age. You will pay an approximately 10% penalty just for dipping in to the money too soon. Not a good idea. It will take a long time to "recover" that money in your new Roth account.
    0 Votes

  • 35x35
    Mar, 2009
    J.
    I'd like to take all my money out of my 401(k) fund and put it in a Roth IRA. My company doesn't offer Roth IRA's. I spoke to my plan administrator and she said I can't because I'm not 59 1/2 and I'm still employed. She said that because we have a "qualified" 401(k) plan, we have to follow the Internal Revenue Code rules for disbursements. She did tell me I could take a loan out. What should I tell her so I can take all my money out of my qualified 401(k) plan?
    0 Votes

  • 35x35
    Mar, 2009
    Sam
    Generally speaking, you have 60 days from the date you receive the distribution to roll your distributed 401k funds into a qualifying plan to avoid taxation and penalties. Depending on your individual circumstances, a 401k withdrawal may be treated as ordinary income by the IRS; therefore it would likely affect your Adjusted Gross Income, the figure used when determining your eligibility to make Roth IRA contributions. However, if you roll the distributed funds into another qualifying retirement account within the required time period, your income would probably not be affected. In answer your final question, you may be able to use your 401k funds to invest in your own business; for example, you may be able to set up an Individual 401k and add your business as an investment option. Remember that I am not your tax adviser and that any information I give is general and may not apply to your specific situation. It is essential that you consult with a qualified tax attorney, CPA, or financial planner prior to taking any action with regard to the funds in your 401k account. This is especially true given the complexity of your desired end result and the amount of money involved.
    0 Votes

  • 35x35
    Mar, 2009
    Doug
    I am considering withdrawing my 401k from a previous employer. It has about $300k and fallling in it and I'm aware of the income tax and penalty issues. Questions - If I withdraw it, do I have a certain amount of time before rolling it over so I can roll-over some but not all? and then roll-it over. 2. Am I subject to income constraints for the Roth due to the amount of the 401k withdrawal? 3. Can I roll it over into a self-created 401k which I would use to fund a business (not yet started) and then make myself adminstrator over the 401k which would provide me access to it and pay myself a salary from it? These are 3 seperate questions, mutually exclusive. Thanks.
    1 Votes

  • 35x35
    Mar, 2009
    Bill
    You can always roll it over to an IRA. You will need to find out the specifics from your current plan administrator.
    0 Votes

  • 35x35
    Mar, 2009
    Mark
    What happens to the money in my 401k once I leave one job for another? To be specific right now my 401k has gotten hammered like everyone elses. However, it is just a paper loss right now but if I rollover will it now become real losses because the positions I hold in the stocks and mutual funds would have to be sold correct?
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    Mark - The 10% is the penalty amount that was withheld for early withdrawal and has nothing to do with the tax that you owe on it. You will now get a form 1099 from your 401k provider, you would then add the $4500 as income for that year and would be liable for income tax as per the tax bracket you fall under, once you add this amount to your regular income. Hope that clarifies it for you.
    0 Votes

  • 35x35
    Mar, 2009
    Mark
    I'm 27 and withdrew about 4500 from my 401k late last year. 10% seemed to have been taken right away, but am I correct in thinking that I owe another 10%? It seems as though this was asked and answered, but I was under the assumption that I would owe 20% total. If so, how do I pay the extra 10%? Thank you so much in advance.
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    If you withdraw the money before you are 59 & 1/2 years old, you are liable to pay a 10% penalty for early withdrawal. Now, there are certain hardship scenarios defined by the IRS where you would be able to avoid the penalty, but you would necessarily have to speak to your plan administrator to confirm that the hardship that you are going through, qualifies for the penalty waiver.
    0 Votes

  • 35x35
    Mar, 2009
    Nat
    I took an early withdrawal from my pension/profit sharing of 40,700...they took 3,700.00 to put towards the 10% penalty. Why on my 1099R is it in Federal Tax section? Does that make a difference. Also, I took it due to huge financial hardship to avoid foreclosure. Why am i still paying a penalty?
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    Yes, you are above the age of 59.5, you can make that withdrawal without any additional penalties. All you will pay is the income taxes (applicable as per your income bracket after you add this amount to your yearly income).
    0 Votes

  • 35x35
    Mar, 2009
    Lloyd
    I'm 61 years old and need to withdraw about $5,000 from my 401k plan at work. Can I do that without paying anything but the 20% tax on the amount. (I'm still working.)
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    That is correct, there will be no penalty on that withdrawal. A slight correction on the process: You will be able to withdraw all the money now, but you will declare the amount your withdraw as income in your tax filing once you receive the 1099 from your 401k provider, so make sure to set aside some money to pay the tax obligation, therefore you want to be careful to withdraw an amount that will not make your income go over the next tax bracket.
    0 Votes

  • 35x35
    Mar, 2009
    Bruce
    My 401K is roughly $25,000. I am 62.5 yr old and could use some of the money to off set a poor car loan and get a newer car with less miles. I travel 62 miles, 5 days a/wk and need a car that gets better mileage. From reading above, I see that I would not be penalized but will have to pay taxes( which could be withheld from the amt I choose) Am I correct? $25,000 will not do much for me in retirement and is it smart to have it work for me now?
    2 Votes

  • 35x35
    Feb, 2009
    Bill
    There will be no deductions because of your medical expenses. Not only will you pay 10% penalty if you withdrew early, you will also have to declare the entire $8K as income for that year. You should have talked to your plan administrator about a hardship based withdrawal, which would not incur the 10% penalty, but if you have already made the withdrawal, I doubt if you can change anything now.
    0 Votes

  • 35x35
    Feb, 2009
    Teresa
    I withdrew $8k on my 401k to pay for my medical expeneses which was was $2500, my AGi was $38k, how much of my $8k is subject to the 10% early withdraw penalty? Thanks.
    0 Votes

    • 35x35
      Mar, 2013
      Vishnu
      My wife, age 71 years, withdrew from her 401(K) profit sharing plan consisting of Before Tax, After Tax, Company's matching contribution, prior plan before and after tax contributions as MRD first time. Her 2012 1099-R shows taxable amount and column 7 - is marked 7 that means "normal distribution" also column 8 other marked "O" Please guide on which line item of 1040 form viz. IRA Distribution 15b or 16b Pensions and annuities can be written. Thanks.
      0 Votes

    • 35x35
      Mar, 2013
      Bill
      Consult with a tax preparer about your question.
      0 Votes

  • 35x35
    Feb, 2009
    Bill
    As you already paid the 10% penalty, you will not have to pay it again. You should have received the 1099 form from your 401k provider. You will have to include the amount that you withdrew as income for that particular year, when you are filing your taxes.
    0 Votes

  • 35x35
    Feb, 2009
    Kris
    my husband took out a hardship withdrawl from his 401k. My husbands company withheld the taxes which was 10% now that i am doing our taxes should i be penalized for early withdrawl?
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    The 10% early withdrawal penalty with be deducted when you make the withdrawal. You will then get a form 1099 from your 410k plan which you will have to declare as income for that year, when you file your taxes.
    0 Votes

  • 35x35
    Feb, 2009
    Bob
    If I withdrawal money from my 401k. How do I pay the IRS for withdrawing early? Do I have to wait until next year? I just want to pay them now and get it over with. What forms will I need to fill out?
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    To Cliff - If you withdraw before you turn 59.5, then you WILL have to pay the 10% penalty. The only exception is if you make a hardship based withdrawal, but you will need to check with the IRS and your plan administrator as to whether the hardship you are going through qualifies as per stipulated guidelines. As far as I know, you can withdraw only cash from your plan, so again, you would have to discuss this with your plan administrator.
    0 Votes

    • 35x35
      Mar, 2011
      Effie
      Hi, Need your help. I got killed last year in taxes when I got terminated from my job and withdrew my money from my 401K. I had taken a loan out initially that I was paying back and when I got terminated I took out the remaining balance of my funds. I ended up having to claim around 30,000 from my 401k on my taxes. I now owe the Feds and state the penalties from that money. My question is, should I have been exempt from paying those fees because I was pregnant when I filed last year and had cobra fees? I went to HR Block so they didn't seem to know too much. Thanks
      0 Votes

    • 35x35
      Mar, 2011
      Bill
      I do not have enough facts about your financial situation to answer your question meaningfully. If the H&R Block tax preparer did not answer your questions to your satisfaction, take your question up the chain of command at H&R Block. Alternatively, seek out a tax lawyer who can review your tax return.
      0 Votes

    • 35x35
      Mar, 2011
      Rick
      There seems to be some confusion here. If you are laid off, quit, or even get fired from your job and are 55 years of age or older you do not pay a 10% penalty tax, according to IRS.
      0 Votes

    • 35x35
      Mar, 2011
      Bill
      As mentioned in the original answer, under the 401(K) guidelines, a taxpayer may be exempt from the 10% penalty tax if, "You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later."
      0 Votes

  • 35x35
    Feb, 2009
    Bill
    To Martha - As long as the withdrawal is done after one turns 59.5, there will not be any penalty assessment and yes, he can withdraw while he is working, but he will have to pay regular income taxes on the amount of withdrawal. You will need to discuss the issue with the plan administrator for more details.
    0 Votes

  • 35x35
    Feb, 2009
    CLIFF
    I have been laid off at my job and am 55. I have $175,000 in my 401k. I need the money for expenses as I anticipate it will take me a long time to find another job. Can I take a partial withdrawal of 60,000 and leave the rest in the Plan? Apparantly this is ok. Also part is in employee owned stock. Not sure whether it needs to be sold?For the money I withdraw I understand they'll retain 20% but I will not pay the 10% penalty correct? Can I still make contributions to the plan if I retain $115,000 in it?
    0 Votes

  • 35x35
    Feb, 2009
    Martha
    One of my employees has a difficult situation with one of his children and will need to withdraw at least 10,000 from his 401(k) to pay for legal services. This employee will turn 60 years of age next month. Would he be penalized? could he withdraw such amount or the total even though he is still employed? Please advide...
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    Whether or not this will fall under the hardship rules is something that will have to be decided by the plan administrator that handled the accounts. The IRS has tough conditions on what qualifies, you can read more here: http://www.irs.gov/retirement/article/0,,id=162416,00.html
    0 Votes

  • 35x35
    Feb, 2009
    Karen
    My husband lost 2 jobs due to closing and cutbacks last year and I lost my job as well. To survive we cashed in our 401k's. Only about $18k. His 2nd job required him to withdraw funds due to under $1k in account. Are we going to have to pay the 10% penalty when we file our taxes or could this fall under the hardship rules?
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    That is a technicality that will have to be decided by your plan administrator. I doubt that you will be able to claim a hardship withdrawal at this point as the loan was taken out before your husband was disabled. Still, there is no harm in speaking to your plan administrator to see if it is possible to claim the hardship.
    0 Votes

  • 35x35
    Feb, 2009
    Leah
    My husband took a $40,000 loan from his pension in 2004, he was hurt at work in 2005 and has been out on disability since that time. For a time this year, we were not receiving any money from disability and I was not able to make the $350 payment. Since I stopped paying it was reported as an early distribution with no exception. Am I am able to avoid this distribution penalty from a loan that was taken before the date of the disability?
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    You will have to check with your plan administrator to see if the hardship you are going through, qualifies for a penalty free withdrawal. The IRS has strict rules regarding hardship withdrawals, you can read more here: http://www.irs.gov/retirement/article/0,,id=162416,00.html
    0 Votes

  • 35x35
    Feb, 2009
    Lee
    Hi, I lost my job to Mexico and enrolled in school as part of the goverment retraining program. I of course wasn't making as much on unemployment as when working, so I pulled my 401k to alleviate some of my debt. I there a break for me as far as the early withdrawal fee?
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    You will be paying taxes on the entire $50,000 (which was the amount of the withdrawal).
    0 Votes

  • 35x35
    Feb, 2009
    Peter
    I'm a little confused about the interplay between the 10% early withdrawal penalty and the marginal tax paid on income from a 401(k). If I have $50,000 and withdraw the entire amount before I'm 59 1/2, I pay a $5,000 penalty. For income tax purposes, am I paying my marginal rate on the entire $50,000 or only on $45,000?
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    Brian, the IRS rules to determine the hardship. You will have to work with your plan administrator and see if you qualify. The IRS Web site states, regarding hardship rules, "(4) payments necessary to prevent eviction from, or foreclosure on, a principal residence" so I am confident that you would qualify.
    1 Votes

  • 35x35
    Feb, 2009
    Brian
    I recently retired as a correction officer at a State of Ohio prison ie. State Employee. I am 53 years old and took a "Plop" or lump sum retirment payment of $80,000 to pay bills. I am in bankrupcy and trying to keep the house. This was not a total distribution but did reduce the amount of future monthly benefits. Is there any way to avoid the 10% penalty for substantiated harpship as I have filed for reorganization in banckrupcy and trying to keep the house. I would have plenty of proof of hardship. Thanks for you input in advance
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    To Brian - The 10% penalty will be deducted upfront.
    0 Votes

    • 35x35
      Apr, 2011
      John
      No, the penalty is up to you to pay, because you have until the end of the year to decide what to do with the distribution, like rolling it over into an IRA, into a new employer's 401k plan, etc. I know because that is how it was for me. 20% mandatory federal tax is the only tax withheld, no state tax is withheld.
      0 Votes

  • 35x35
    Feb, 2009
    Bill
    To Kris - You will have to declare the withdrawal as income, but you will not be penalized again.
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    To Cheryl - You will be liable to pay the regular income taxes plus the 10% early withdrawal penalty.
    0 Votes

  • 35x35
    Feb, 2009
    Brian
    I am considering taking a 100% disbursement from a 401 K to make it through hard times. I am aware of the 20% fed tax and a 4% state tax. These two are withheld up front. How does the 10% penalty figure in? Will it be paid upfront or on my 09 tax returns? I understand that the balance will be declared as taxable income for 09.
    0 Votes

  • 35x35
    Feb, 2009
    Kris
    We took a hardship withdrawl from my husbands 401k to buy a house, we paid the 10% already. i'm doing our taxes do we get penalized again?
    0 Votes

  • 35x35
    Feb, 2009
    cheryl
    Husband was laid off over a year ago. Lost lots of money he had in the 401k. We would like to take out what we have left to pay off debt we have and be able to live a bit more comfortable. I understand we would be penalized for early withdrawal and pay taxes on this at the time of withdrawal... How about at tax time? Will we be taxed again because we still have to claim it as income on our taxes? We live in Massachusetts.
    2 Votes

  • 35x35
    Jan, 2009
    Bill
    That is incorrect. You will not face a penalty as you are above the age of 59.5. What you will pay though is whatever income taxes that you will be liable for as per as your tax bracket after you add the amount from the withdrawal to your income for that particular year.
    0 Votes

    • 35x35
      Apr, 2011
      Pat
      I am 62 and would like to withdraw some money from my 401K. I was laid off in February with no option of being re-hired. If I pay a 20% IRS tax when I withdraw, do I have to pay again as income tax time as added income? Would that amount be after the taxes or before, because that seems like I'm paying taxes twice. Is the withdrawal 20% of what you are taking out? Thank you,
      1 Votes

    • 35x35
      Apr, 2011
      Bill
      I do not answer "How much taxes should I pay" types of questions because I never have enough information about the reader's situation. Consult with a tax preparer who can review your entire return and financial situation to learn what amount to withhold.

      The amount your 401(k) administrator withholds is applied when you prepare your tax return. In other words, it is not ignored.
      0 Votes

  • 35x35
    Jan, 2009
    Annie
    I am 61 years old and want to get out of my 401K plan. There is not much money in there and they are saying I will have to pay 20% penalty. I understood that I would have to turn it in as income on my taxes but I would not be penalized because I am over 59 1/2. Please help me.
    0 Votes

  • 35x35
    Jan, 2009
    Bill
    It is when you actually turn 59.5 years old.
    0 Votes

  • 35x35
    Jan, 2009
    Bill
    If you have paid the penalty and taxes already, then all you need to do is declare the income on your taxes. you should get a form 1099 from your 401k plan.
    1 Votes

  • 35x35
    Jan, 2009
    Bill
    Talk to your 401k plan administrator, they will be able to tell you if you qualify for a hardship withdrawal. Speak with the plan administrator about the possibility of borrowing from your account, as borrowed funds that are repaid as agreed are not subject to the 10% penalty for early withdrawal nor are they taxable.
    0 Votes

    • 35x35
      Feb, 2011
      Sharon
      You would still need to check with your administrator plan because my 401K only allows one time loan until it is paid we are not allowed to borrow any more money.
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      Sharon raises an excellent point. Congress set guidelines for 401(k) plans and gave employers flexibility to tailor their plans to employees' needs and the employers' values. Each 401(k) is a little different, and some may have restrictions that others do not.
      0 Votes

  • 35x35
    Jan, 2009
    Tina
    I left my job, and had previously taken out a 3200 loan against my 401k. I left my employer before I made any payments back towards that loan. I then cashed out my additional 2200 that I had left in my 401k. I paid the 20% tax and 10% penalty. Do I need to claim this on my taxes when I file this year? How will I be penalized?
    6 Votes

  • 35x35
    Jan, 2009
    Lynn
    Need your help to clarify mixed answers from two different sources in regards to avoiding penalties once you reach 59.5 years old: Is it when you actually turn 59.5 years old or the year you turn 59.5 years old?
    5 Votes

  • 35x35
    Jan, 2009
    Ted
    I am going through some tough financial difficulties lost some of my income per week and my wife has lost most of hers [a realitor and now only working part time] we have not yet gone into forclosure but are having a real tough time paying or debt. Not worried about the penalties,can I withdraw my monies to pay off my debt?
    6 Votes

  • 35x35
    Jan, 2009
    Bill
    If you ask me personally, I will never touch my retirement savings, but taking into consideration the current market conditions, it makes sense for you to contribute enough so that you get the total match from your employer. Be really careful with your choice of investment products with your 401k savings and make sure to balance the risks with the rewards. Do you really need the 22K from your previous 401K account? If you can do without it, you would be better off to roll it over into a ROTH IRA.
    0 Votes

  • 35x35
    Jan, 2009
    Eric
    I have a scenario that my little brain seems is good, but not smart enough to tie it all together. I am 32. I have an old 401K that I rolled into a retirement account. It now has 35k in it (boo hoo, used to be 53k). I have a 401k with my current employer, who contributes 50% up to 6%. The market is now starting to come up, so it will be good for those who make contributions. However, I am not contributing to my old account, just my current 401K. I was thinking about getting my money from my old account, giving me about 22k after taxes and penalty and putting it aside to pay for bills that my new plan would create. For my "new plan" I was thinking about upping my current 401k % to 10% or more of pay, taking advantage of the full employer match and the rising market. I figure if I did this, I ought to be able to surpass my measelly 35k pretty quickly. Any thoughts?
    1 Votes

  • 35x35
    Dec, 2008
    Bill
    I typically does not, but in some rare cases it can be construed as hardship. You should seek counsel from your tax attorney or your divorce attorney for your specific information. Good luck.
    0 Votes

  • 35x35
    Dec, 2008
    Rebecca
    I'm going through a divorce and I don't know how I'm going to be able to afford house payment on my own. Does divorce qualify for hardship under particular situations?
    0 Votes

  • 35x35
    Jan, 2008
    Newman
    You will have to check with your plan administrator to see if your hardship does indeed qualify for withdrawal without a penalty.
    0 Votes

  • 35x35
    Jan, 2008
    Dwight
    I'm 59 yrs old. I have been laid off from my job. I have enough funds in my 401k to pay off my home loan. Is is possible to avoid early withdrawl pen. due to loss of employment.
    13 Votes

  • 35x35
    Jan, 2008
    Nithin
    The withdrawal is penalty free "only" if you meet the stringent conditions for a hardship criteria that are detailed in the article.
    8 Votes

  • 35x35
    Jan, 2008
    Kerry
    Am I to understand the exception listed in this post, that if I retire early at age 55, separating from my employer,I can take a penalty free withdrawal from my 401k, and only pay income taxes on the amount withdrawn?
    20 Votes

  • 35x35
    Jan, 2008
    Ray
    You will have to check with your plan administrator. Usually any withdrawal before the age of 59 1/2 is subject to the penalty. The criteria for hardships tend to be very stringently enforced, so I cannot really say whether you would qualify or not, just based upon the information you have given me.
    1 Votes

  • 35x35
    Jan, 2008
    Lynda
    My husband has a 401k plan in which he withdrew enough to get by in 2007. Would he be able to claim hardships and avoid the 10% penalty due to my medical costs and to help pay the rent, where we live? Can he claim a combination of the two? He retired from his job October,2006 at the age of 52. Thanks
    13 Votes

  • 35x35
    Feb, 2008
    Nithin
    Jennifer, the specificity of the rules is dependent on what the IRS will accept. You will need to speak to your plan administrator about your situation. They will in turn check to see if your hardship would qualify.
    0 Votes

  • 35x35
    Feb, 2008
    Jennifer
    Hi, I am 35 yrs old and have been unemployed for a year now. I am still looking for a job, but very difficult to to multiple health issues (severe chronic daily pain which I have had for years now and also, more recently, suffered broken pelvis bone and after that broken ankle). Have tried to find "work from home" without success. We (husband and I) have gone through our entire savings and more in order to meet bills/mortgage etc..over last year. Now out of money again. My question is, I am forced to take a full withdrawal from my 401K plan (from previous employer). I'm sure I have to pay the 20% for fed taxes, but is there anyway I can claim exemption from the 10% penalty? I read your article, and know personally that I definitely have a true financial/health hardship, but don't know what specific exemption rule (if any) I could qulaify under. Thanks.
    17 Votes

  • 35x35
    Mar, 2008
    Sue
    On a 401k hardships do I have to have something from the company saying its a hardship? My 1009R just says that it is a distribution code 1. Does this mean that I'm still subjected to the penalties and do I still claim the taxable amount on my taxes ? Thanks for your imput. Sue
    0 Votes

  • 35x35
    Mar, 2008
    Bill
    You will need to speak to your plan administrator and provide them with the information pertaining to your hardship. Your plan administrator would then check with the IRS rules, to see if your hardship qualifies for you to make a penalty free withdrawal. As far as the 1009R is concerned, it would be best for you to consult with your tax attorney to clarify the same.
    0 Votes

  • 35x35
    Apr, 2008
    Bill
    Michael, I suggest that you contact your plan administrator. The fact that you need to make this withdrawal because of a medical hardship might qualify for penalty free withdrawal. Only your plan administrator will be able to tell you if your hardship qualifies or not.
    0 Votes

  • 35x35
    Apr, 2008
    Michael
    I have been recently moved from long term disability status to drawing social security,as a result of a stroke that occurred in Dec 2005. Must I wait untill 59 1/2 to make a 401K withdrawal without penalty for early withdrawal?
    0 Votes