401k Hardship Medical Distribution

If the facts you presented are accurate, you may receive a penalty-free distribution from your 401(k) if your debt for medical expenses exceeds 7.5% of your adjusted gross income. Allow me to explain.

Two types of hardship withdrawals, called "distributions," are permitted from 401(k) plans. One is called a financial hardship withdrawal. It is subject to applicable income taxes and a 10% early withdrawal penalty if you are younger than 59½. The other is a penalty-free withdrawal made under Section 72(t) of the Internal Revenue Code. With this, you pay applicable income taxes but not an early withdrawal penalty.

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

You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

• 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).

You will be taxed at your usual federal income tax rate.

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

Best,

Bill

Bills.com