Information on 401K hardship and withdrawal rules - The Bills.com Blog
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Information on 401K hardship and withdrawal rules
Question: I read that at age 55 I can withdraw my 401k without penalty as long as I am leaving my job. Is this true for all 401 k plans? Are there any specific reasons one has to have for withdrawal without penalty?
Answer: A 401(k) plan is a type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion ofhis or her cash wages to the plan on a pre?tax basis. These deferred wages (commonly referred to as elective deferrals) are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2.
However, they are included as wages subject to social security, Medicare, and federal unemployment taxes.
Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs. Generally, hardship distributions from a 401(k) plan are limited to the amount of the employee's elective deferrals only, and do not include any income earned on the deferred amounts. Hardship distributions are not treated as eligible rollover distributions.
Hardship Basics
A hardship withdrawal is not like a plan loan. The withdrawal may be difficult to get, and costly if you receive it. Remember, your 401k is meant to provide retirement income. It should be a last-resort source of cash
for expenses before then. IRS rules allow plan withdrawals in a limited number of hardship situations. To further discourage early withdrawals, in some cases the IRS imposes a hefty financial penalty.
Two types of hardship withdrawals are permitted from 401k plans. One is called a financial hardship withdrawal. It is subject to applicable income taxes and a 10 percent early withdrawal penalty if you are younger than 59 1/2. 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 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 59 1/2, whichever is longer.)
Finally, employers are not required to offer either type of hardship withdrawal, so you should check with your employer to see which type, if any, is available to you. I hope this information has helped you Find. Learn. Save!
Best,
Bill
www.bills.com
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1. Posted by Bill Pike on Wednesday 9th January 2008 11:30
can you take hardship for a fire the destroy home/primary residence
2. Posted by Nate on Wednesday 9th January 2008 11:58
You will need to contact your plan administrator. The plan administrator will then contact the IRS with the details of your case to see if it does indeed qualify for the hardship criteria.
3. Posted by windy hall on Monday 25th February 2008 06:15
I am going thru a devoice.I want to go thru it the cheapest way possible. So I trying to have all ready to offer to my husband when we go to file.I wanted to withdraw from my plan to pay him.Please tell me what is possible. Thanks Windy
4. Posted by Nathan on Monday 25th February 2008 08:21
Windy, please contact your plan administrator to find out if your divorce qualifies as a hardship withdrawal. The rules are pretty rigid, so if the divorce does not qualify, I would advice against pulling those funds out because the penalty will be very steep.
5. Posted by Kenneth Barton on Monday 10th March 2008 10:14
The company I worked for went out of business while I was out for disability. I am still disabled and awaiting a hearing from the Soc. Sec Adm. I have received a check from my former 401k,how much penalty and taxes will I have to pay if I declare a hardship withdrawal? The check is $26,000 and I am 58 years old. I am financially strapped at this time and need the money to pay my bills and my medical needs.
6. Posted by Bill on Monday 10th March 2008 14:28
There are only a few instances where the IRS would qualify a hardship based withdrawal. You will need to speak to your plan administrator from before and discuss your situation in detail. Your plan administrator would then see whether you qualify or not. In the event that you do not qualify, the penalty for early withdrawal (before the age of 59 1/2)is an additional 10% on top of the regular income tax that you would pay.
7. Posted by Shedrick Jackson on Wednesday 16th April 2008 14:02
I have just purchased my first home which is now my primary home of residence. I had an inspection done on the house and what was wrong was the following. First water heater floor was weak and bowed, there is grout cracks in the mastere shower walls and also the second bathroom. The back door is not closing shut due to the frame is rotted and the front door frame look like someone may have kicked the door in. Also the hot water heater TPR Line & Flue is not connected, I was told by the inspector that this is hazardous and require immediate attention. I have gotten a estimate on the repairs and my insurance stated that this is not covered in the insurance. My question to you is I have offical documents supporting all of this, can I take out an Hardship withrawl from my 401K for these repairs?
8. Posted by Bill on Thursday 17th April 2008 18:14
You will have to consult with your plan administrator to find out whether or not what you have explained in your question, qualifies as a valid reason for a hardship based withdrawal. The IRS has strict rules governing it and only a plan administrator can help in this regard.