Information on tax and penalties for 401(k) early withdrawal - The Bills.com Blog

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separating from my employer,I can take a penalty free withdrawal from my 401k, and only pay income taxes on the amount withdrawn?

The withdrawal is penalty free "only" if you meet the stringent conditions for a hardship criteria that are detailed in the article.

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.

You will have to check with your plan administrator to see if your hardship does indeed qualify for withdrawal without a penalty.

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

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.

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.

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.

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

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.

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?

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.

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?

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.

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?

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.

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?

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?

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?

Talk to your 401k plan administrator, they will be able to tell you if you qualify for a hardship withdrawal. Moreover, why not borrow money against your plan instead of cashing out? It is your money, you can definitely withdraw the funds for any reason.

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.

It is when you actually turn 59.5 years old.

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.

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.

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.

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?

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.

To Cheryl - You will be liable to pay the regular income taxes plus the 10% early withdrawal penalty.

To Kris - You will have to declare the withdrawal as income, but you will not be penalized again.

To Brian - The 10% penalty will be deducted upfront.

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

Brian, the IRS has its own set of rules to determine the hardship, you can check for your eligibility here: http://www.irs.gov/retirement/article/0,,id=162416,00.html. You will have to work with your plan administrator and see if you qualify. The IRS website states "(4) payments necessary to prevent eviction from, or foreclosure on, a principal residence" so I am sure you would qualify.

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?

You will be paying taxes on the entire $50,000 (which was the amount of the withdrawal).

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?

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

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?

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.

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?

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

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...

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?

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.

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.

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?

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.

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?

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.

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.

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.

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?

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.

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.)

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).

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?

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.

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.

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.

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?

You can always roll it over to an IRA. You will need to find out the specifics from your current plan administrator.

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.

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.

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?

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.

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

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

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?

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.

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?

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

You would have to check that with your plan administrator.

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!

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.

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

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.

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?

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.

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

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.

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?

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.

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?

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.

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?

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.

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

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.

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?

According to the IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules, "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.

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.

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.

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

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.

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?

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.

My husband lost a good paying job 6 years ago. He has gone from job to job and is currently in another state and does not make enough to contribute to the mortgage. I am left to carry the debt load and mortgage. I cannot sell my home to cover the outstanding mortgage without making expensive repairs. I am 61 years of age. Can I take an early withdrawal to supplement my salary to make the mortgage payments/repairs? I have depleted my savings account and fear going into foreclosure.

You do not mention what kind of account you want to make a withdrawal from. Rather than guess, here are links to IRS documents discussing the distributions rules for 401(k), IRAs, and 403(b) plans: 401(k) Resource Guide - Plan Participants - General Distribution Rules, Publication 590 (2008), Individual Retirement Arrangements (IRAs) and Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). Generally speaking, a plan participant can begin to accept distributions without penalty from the three plans I mentioned starting at age 59 1/2. Check with your plan administrator to see your plan's rules.

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.

If you are thinking of receiving a small distribution, then your tax rate will be low, given your income.

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.

See § 72. Annuities; certain proceeds of endowment and life insurance contracts for the following distribution rules for 401(k) and similar accounts:

(t) 10-percent additional tax on early distributions from qualified retirement plans
(1) Imposition of additional tax If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
(2) Subsection not to apply to certain distributions Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:
(A) In general Distributions which are - (i) made on or after the date on which the employee attains age 59 1/2, (ii) made to a beneficiary (or to the estate of the employee) on or after the death of the employee, (iii) attributable to the employee's being disabled within the meaning of subsection (m)(7)

Subsection (m)(7) reads as follows:
(7) Meaning of disabled
For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.

If I read Section 72 correctly, if a person qualifies as disabled under subsection (m)(7), he or she may take a distribution from a 410(k) plan without paying the 10% penalty. As to how to report the income, 401(k) Resource Guide - Plan Participants - General Distribution Rules states "To report the tax on early distributions, a participant may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. See the Form 5329 instructions for additional information about this tax."

I need to with draw all of my money from my 401K account.. How do I do this?

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.

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.

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.

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.

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.

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?

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.

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.

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.

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

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. See IRA Online Resource Guide - Information About Rollovers.

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??

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.

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...

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.

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

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.

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?

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.

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.

I'm 58 and withdrew $6000.00 from my 401k to purchase a first time home...what will my taxes be on that amount?

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.

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.

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.

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.

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?

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.