401k hardship

[ranger05]

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.

 

[ziggy29]

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.

 

[Martha]

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.

Here is the IRS publication on 401ks: Publication 560 (2007), Retirement Plans for Small Business

Another IRS publication says in part:

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))

 

[jazz4cash]

Did you or did you not pay the 10% penalty?

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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.

 

[old woman]

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.

 

[Martha]

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.

 

[REWahoo]

Did you or did you not pay the 10% penalty?

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.

Yes, they withheld the 10% tax penalty. The rest of the taxes I pay at the end of the year I assume.

 

[Martha]

What, you mean to say that I should read what a poster says before I respond?

 

[REWahoo]

If the shoe fits...

 

[nepo]

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.

 

[nepo]

Here's a summary of what hardship withdrawals are and under what conditions you may not pay a penalty:

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.

401khelpcenter.com - Hardship Withdrawals Give Access to Your 401k Savings, But at a Cost

 

[A854321]

Paying off some credit card debt and having leftover cash for "reinvesting" is not going to qualify as a hardship loan, is it?

jazz4cash has the best suggestion. You need to get this money back where it belongs, not rolling around in your pocket.

 

[jazz4cash]

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.......

 

[Buckeye]

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.

 

[jazz4cash]

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.

 

[ranger05]

Okay, I talked to Fidelity and there's no problem with keeping the cash. They say this happens all the time, and there are no additional penalties involved. The money CAN NOT be returned to the 401k.

 

[putty]

Great. Looks like you can get that big screen TV after all. Congratualtions!

How old are you ranger?

 

[ranger05]

Im 38 and i'm not really concerned about my retirement, so don't panic. The 20k I w/d was only a small fraction of my balance. And not to give people the wrong impression, but money is really not a problem for me. I come from a family of money. Now that said, I DON'T live on Dads money so please don't get the wrong idea. I work 50-60 hrs a week even though I don't really need to. And I already have a big screen TV.

 

[putty]

Im 38 and i'm not really concerned about my retirement, so don't panic. The 20k I w/d was only a small fraction of my balance. And not to give people the wrong impression, but money is really not a problem for me. I come from a family of money. Now that said, I DON'T live on Dads money so please don't get the wrong idea. I work 50-60 hrs a week even though I don't really need to. And I already have a big screen TV.

Good for you(not sarcastic). I hope things work out for you.