First thing I would do is ask your plan administrator - I don't believe there will be any implications from the IRS since you will be (a) paying the taxes now instead of decades from now and (b) paying the 10% early withdrawal penalty.
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Should be no problems, but BE SURE to keep any info about the house you tried to buy in case the IRS asks for documentation. Since the money you took out CAN NOT be redeposited into you 401K, you can do whatever you want with the money now. After all, between penalties and taxes you'll only be getting a net of 65-75 cents on the dollar...............
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Great advise all the way around, but still, no answer to my question. I think you people can't comprehend someone would be dumb enough to WANT to take 20k out of their 401k and NOT replace it. I know it's poor, poor, money management indeed, but hey, i'm gonna do something real stupid just this one time and get myself out of debt.
I'm not going to answer your question either, because I don't know what the legal requirements are for your situation. But I do want to ask you a few questions.
Since you got yourself in debt and want to use this 401k money to get yourself out, what's changed in your life to prevent you from getting yourself right back into debt? Wouldn't the best approach (certainly not the easiest) be to buckle down, cut your spending and pay your way out of debt? Even if you choose to go the "poor, poor, money management" route, aren't you going to have to cut your spending anyhow to stay out of debt? Have you considered what the total cost will be for the 10% penalty plus paying tax on the $20K at your marginal rate? Ouch!
As you say, it is a "stupid" way out of debt, so why do it?
Good points REW, and I understand what your thinking. I'm really not in alot of debt. The 18k I recieved would pay off ALL my bills and still leave me 10-12k left. I guess I really just WANT to keep this money for some reason. I guess I could reinvest some of it. But, again, I just wanted to make sure I wasn't doing something illegal.
Good points REW, and I understand what your thinking. I'm really not in alot of debt. The 18k I recieved would pay off ALL my bills and still leave me 10-12k left. I guess I really just WANT to keep this money for some reason. I guess I could reinvest some of it. But, again, I just wanted to make sure I wasn't doing something illegal.
You don't need a reason to pull money out if you are willing to pay taxes and the 10% penalty.
Of course, in some situations, when considering federal and state income taxes and the penalty, it could result in pulling out 2X and only getting X.
__________________ "Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
Remember this was a hardship withdrawal and not a loan. I've heard it's much more difficult to obtain a hardship where as anyone can get a loan if your plan allows it. But that said, it wasn't hard to get the hardship after all.
Remember this was a hardship withdrawal and not a loan. I've heard it's much more difficult to obtain a hardship where as anyone can get a loan if your plan allows it. But that said, it wasn't hard to get the hardship after all.
Did you or did you not pay the 10% penalty?
If you did NOT, you are probably liable for it now that the deal fell through. If you DID pay the 10% penalty when you received the distribution, you need no further justification. Anyone can withdraw from their 401K or traditional IRA any time, and for any reason, as long as they are willing to pay ordinary income tax AND a 10% penalty on the distribution.
This has nothing to do with a loan one way or the other.
__________________ "Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
You withdrawal was not a proper hardship withdrawal. However, I do not know if any additional penalties would apply to you as you have to pay the income tax and 10% penalty anyway. You might want to ask your tax advisor or read the IRS regulations under section 1.401(k).
You are not able to contribute to your 401k for six months following a hardship withdrawal. Also, you are not eligible to rollover a hardship withdrawal into an IRA.
Retirement Plans FAQs regarding Hardship Distributions 5. What are the consequences of taking a hardship distribution of elective contributions from a 401(k) plan? After an employee receives a hardship distribution of elective contributions from his or her 401(k) plan, generally the employee will be prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.
(Reg. §1.401(k)-1(d)(3)(iv)(E)(2))
Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Thus, a hardship distribution permanently reduces the employee's account balance under the plan.
A hardship distribution cannot be rolled over into an IRA or another qualified plan.
(Code § 402(c)(4))
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Do not rely on the information provided--my posts are not to be taken as legal advice. Needless to say you must consult with your legal representative. I am not responsible for errors. If I offended you with cya I apologize. If I did not, I tried.
The penalty would not be actually paid until taxes are filed for 2008. I believe there is mandatory withholding which is was the 10%. Next year at tax time the gross distribution (20k) would be subject to tax at the OP's marginal rate (that's 3k @ 15% or 5k @ 25%), then the 10% early distribution penalty would be assessed (2K) for a total hit of 5-7K........so you would be paying DOUBLE to get the debt paid off.
I don't get the bit in Martha's post that says "Hardship distributions are includible in gross income unless they consist of designated Roth contributions" and elsewhere it says "you are not eligible to rollover a hardship withdrawal into an IRA." (my 401k says this also). I thought Roth contributions are generally included as gross income anyway.
This is an EXTREMELY expensive way for OP to pay off his debt. He should throw himself on the mercy of the Plan Admin and see if the funds can be restored.
There might also be state taxes and state penalty so if the Federal is 35% and the state is 10% it could cost 45% to get the money. The only way to make it cost more is to not pay enough in estimates or withholding to avoid penalties. Make sure you have more withheld in 2008 than your total tax bill for 2007.
I would probably try to return the money to the plan if they will cancel the hardship, maybe plead temporary insanity.
I don't get the bit in Martha's post that says "Hardship distributions are includible in gross income unless they consist of designated Roth contributions" and elsewhere it says "you are not eligible to rollover a hardship withdrawal into an IRA." (my 401k says this also). I thought Roth contributions are generally included as gross income anyway.
If it was a Roth contribution, you already paid income taxes on it so it would not be taxed again, hence not included in your gross income for the year you took it out of the plan.
BTW, the OP might not have had taxes withheld on the hardship withdrawal. IIRC, neither the taxes nor the penalty have to be withheld by the employer when making a hardship distribution. The employee then will be totally responsible for paying both.
__________________ .
Do not rely on the information provided--my posts are not to be taken as legal advice. Needless to say you must consult with your legal representative. I am not responsible for errors. If I offended you with cya I apologize. If I did not, I tried.
BTW, the OP might not have had taxes withheld on the hardship withdrawal. IIRC, neither the taxes nor the penalty have to be withheld by the employer when making a hardship distribution. The employee then will be totally responsible for paying both.
The OP did say the 10% penalty, but not taxes, had been withheld.
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Originally Posted by ranger05
Yes, they withheld the 10% tax penalty. The rest of the taxes I pay at the end of the year I assume.
What, you mean to say that I should read what a poster says before I respond?
__________________ .
Do not rely on the information provided--my posts are not to be taken as legal advice. Needless to say you must consult with your legal representative. I am not responsible for errors. If I offended you with cya I apologize. If I did not, I tried.
This is an EXTREMELY expensive way for OP to pay off his debt. He should throw himself on the mercy of the Plan Admin and see if the funds can be restored.
The best summary of the situation I've seen so far. Don't try this at home.
Here's a summary of what hardship withdrawals are and under what conditions you may not pay a penalty:
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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.
Knowing that workers would resist putting aside money for decades with no chance to access it, Congress made provisions in the 401k rules to allow plan withdrawals in a limited number of hardship situations. These include:
Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee's principal residence.
Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
For funeral expenses and repair of a primary residence.
But to discourage these early hardship withdrawals, in most all cases the IRS imposes a hefty financial penalty including a 10 percent early withdrawal penalty if you are younger than 59 1/2.
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.)
Employers are not required to offer any type of hardship withdrawal, so you should check with your employer to see if it is available to you.
If it was a Roth contribution, you already paid income taxes on it so it would not be taxed again, hence not included in your gross income for the year you took it out of the plan.
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ok...now I get it, I think. They're saying if its comming OUT of a Roth account.......
So the fact OP didn't end up buying a home with the hardship withdrawl would only show up if the company plan was audited and it was revealed the plan had made a hardship distribution when it shouldn't have? Does the plan get penalized for not following the rules?
OP can't get penalized much more since he will be paying a 10% federal penalty (and maybe state, too) and federal income tax (and maybe state, too) on the $20,000. It sounds like the fact that a person is spending the hardship withdrawl on a home purchase (or any of the approved hardship withdrawl reasons) does not save him any taxes or penalties, it just allows him to get hold of the money.
It sounds like the fact that a person is spending the hardship withdrawl on a home purchase (or any of the approved hardship withdrawl reasons) does not save him any taxes or penalties, it just allows him to get hold of the money.
Exactly! Many get the impression that "hardship" means penalties get waived, but they don't.
IRA withdrawals DO have exceptions from the 10% penalty which are similar to the hardship withdrawal conditions, but the penalty is waived. Some 401ks permit IRA rollovers, so you could do a rollover first, and then withdraw from the IRA.
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