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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13605
Experience:  15years with H & R Block. Divisional leader, Instructor
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I have been unemployed since June 2013. I was laid-off from

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I have been unemployed since June 2013. I was laid-off from the company that sponsored my 401K in October of 2010. Since that time I have been only able to find short-term, consulting contracts. I have exhausted my savings and am considering a hardship withdrawal from my 401K Plan to pay my mortgage. I was 54 years old at the time I was laid-off from the 401K sponsoring company. I am currently 57 years old.
Question: Will the 10% early withdrawal penalty apply to the amount I withdraw? Or, are there any ways in which I can avoid the early withdrawal penalty? I have been told that taking the withdrawal distribution in installments may be a possible option for avoiding the early withdrawal penalty?

Thank You,

Robin D. :

Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.
Unfortunately, yes. If you receive a distribution then you would have the 10% penalty.
If you were released from the job after you had reached 55 then that would be an exception.
Of course there are other regular exceptions. Maybe the one that would help you is for medical.

Robin D. :

Distributions to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year. This would include insurance too if you continued to pay your health insurance (maybe through COBRA).

Robin D. :

Installment distributions--- Yes, Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary are an exception.

Robin D. :

These are referred to as T72 because of the IRC that covers this, 72(t)(2)(A)(iv)

Robin D. :

You would use the form 5329 when you file your return if you can use either of these ways to show the relief from the 10% penalty

Robin D. :

My goal is to give you excellent service. If you are satisfied, please rate me. If you have follow-up questions on this same topic, use the reply box below. To start a new conversation with me on a new topic request me again.

Customer:

OK. My 401K is with Vanguard. The advisor indicated I can initiate installment withdrawals while I am out of work and terminate the withdrawals, once I am back at work. Will this approach work? Or, are there other conditions as to what qualifies as; "substantially equal periodic payments over your life expectancy"?

Robin D. :

It could but you would have to follow the rules if you modify the distributions (stop them when you return to work).
If the series of substantially equal periodic payments is subsequently modified (other than by reason of death or disability) within 5 years of the date of the first payment, or, if later, age 59½ (before you turn 59 1/2), the exception to the 10% tax does not apply. In that case, your tax for the modification year is increased by the amount that would have been imposed (but for the exception), plus interest for the deferral period.

Robin D. :

So you would have to wait till you were more than 59 1/2 to stop them.

Customer:

OK. I think I understand. So, the 5329 form will be needed for the year I receive any distribution?

Robin D. :

That is correct

Customer:

OK. Thank You

Robin D. :

You are most welcome.
Your positive rating is always thanks enough.

Robin D. :

And if you’re a subscription customer, feel free to add me to your Preferred Expert Team so we can work together in the future

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