Do You Qualify for A Penalty-Free Hardship Withdrawal From Your 401(k) or Other Qualified Retirement Plan?

You can take a distribution from your 401(k) without penalty only if you leave employment or the plan terminates, you turn 59 ½ years old, or you qualify for a hardship withdrawal. The penalty for withdrawing under any other set of circumstance is ten percent.

The Internal Revenue Service does not count being flat broke as a qualifier for an early withdrawal from your 401(k). You must show that you have an immediate and heavy financial need, and that the amount of your withdrawal must be necessary to satisfy the financial need. While each request is reviewed for its own facts and circumstances, the following are examples of expenses that can be deemed to be immediate and heavy:

• Unreimbursed Medical Expenses – you are allowed to withdraw money from your retirement plan to pay for unreimbursed deductible medical expenses that exceed ten percent of your adjusted gross income, if the withdrawal is made within the same year as the medical expenses were incurred.

• Disability – if you receive Social Security disability payments because it has been determined that you are totally and permanently disabled, you can take a withdrawal without penalty.

• Healthcare Insurance Premiums – If you have been unemployed for more than at least 12 weeks, you may take a withdrawal without penalty to pay for health care insurance premiums.

• Death – If you are the beneficiary of a qualified retirement plan, and the plan owner dies, you are allowed to withdraw from it without penalty.

• You Want to Pay Your Taxes With the Funds – if the IRS has placed a levy against your retirement account, you may take a penalty-free withdrawal from that account in order to pay your tax debt.

• Court Ordered – If your divorce decree or other subsequent maintenance or child support modification orders the withdrawal and re-distribution.

• Purchase of Principal Residence – You can take a penalty-free withdrawal from an IRA if you have not owned a home in the previous two years, up to a $10,000 limit. You can only take a penalty-free withdrawal from a 401(l) if you have already used your 401(l k) loan provision.

Keep in mind that the IRS will not consider the withdrawal necessary to cover your financial hardship if you have any other resource available to meet your need.  This includes assets available to not just you, but available to your spouse and/or minor children.

If you have questions as to whether you might qualify for a hardship distribution, the professionals at Nielsen Law Group are ready to assist you. Call (480) 888-71111 or submit a web request here.