Have a Tax Question? Ask a Tax Expert
Unfortunately, yes. You will owe income tax plus the 10% penalty on the withdrawal, unless you qualify to one to the exceptions.
Some of the exceptions are total disability, medical expenses over the 7.5% of income, death, or divorce.
I read the irs.gov document and it mentions that a hardship would include purchase of a primary residence. The withdrawal I have in mind would allow me to purchase my home from the bank (pay off mortgage) and would avoid a situation of possible forclosure
I would have to check if that would qualify as a purchase. The exception to the penalty for the purchase of a home only applies to IRA withdrawal, not 401k.
If you are familiar with IRS.gov, search "hardship distributions" and read the Retirement Topics - Hardship Distributions. Near the bottom of the page it says if it is an early distribution, it is subject to the penalty.
Here is the wording from IRS that I'm looking at: Exceptions. The 10% tax will not apply if distributions before age 59 ½ are made in any of the following circumstances:
whoops - ignore that - here is what I meant to send:
I may have just answered my own question - looks like I was misinterpreting the conditions that allow withdrawal with those req'd to avoid penalty
That's what I was trying to explain. The rules for getting the distribution are different from the rules for exception to the penaly.
Thanks for using Just Answer. Let me know if you need any more help.
can you verify whether I would qualify for a hardship withdrawal if funds were going to pay off my mortgage? Again - I am unemployed and although I still have savings that I'm using to pay my mortgage, I would like to use 401K to pay off the mtg, save 113K in interest over the life of the loan. With 30% (tax + penalty) it will cost about 42K, which nets me a savings of 71K and keeps me from loosing the house if I can't get an adequate paying job soon.
I'm not sure if you received my previous answers, the chat function appears to be stalled.
Anyway, you do qualify for a hardship withdrawal and the amount of tax a penalty owed on the withdrawal can be included as part of you hardship need. Your plan administrator will tell you what they need to consider the distribution.
If it is possible to take a total distribution due to separation from service, this may be the better way to go. The funds available for a hardship are limited to employee contributions and cannot include earnings or employer contributions.
Please make sure the 30% will be enough to cover your tax and penalty. I can't calculate this without knowing more about your situation.
I hope this has been helpful to you.
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