There is a hardship clause. However, your employer will most likely withhold 20% of your 401(k) for tax withholding purposes. This amount will be reflected on your W-2 at the end of the year as taxes already paid by you, as will the amount of your withdrawal. You may get a portion of that 20% back when you file your return. In addition, if you’re not at least 59 1/2, you will be required to pay a 10% penalty on the withdrawal. This penalty is listed on your end of year tax return as well, not taken off the top, like the 20% withholding.
the employer will NOT automatically withhold anything. Hardship withdrawals are not eligible to be rolled over and do not have automatic withholding like that. You can elect 0%, 20%, or even 30% to be withheld. You can also net up the distribution amount to account for the withholding…ie if you need 5k and you want 30% withheld then you would take $7,150 (assuming that you have that much in contributions of course).
The hardship clauses in the 401k rules allow you access to the money. They do not, however, relieve you of the tax and penalty obligation.
Withdrawal of funds from a 401k, even to avoid foreclosure, is subject to ordinary income taxes plus a 10% penalty if you are not 59 1/2.
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5 Comments
October 22nd, 2009 at 9:50 am
There is a hardship clause. However, your employer will most likely withhold 20% of your 401(k) for tax withholding purposes. This amount will be reflected on your W-2 at the end of the year as taxes already paid by you, as will the amount of your withdrawal. You may get a portion of that 20% back when you file your return. In addition, if you’re not at least 59 1/2, you will be required to pay a 10% penalty on the withdrawal. This penalty is listed on your end of year tax return as well, not taken off the top, like the 20% withholding.
October 22nd, 2009 at 10:40 am
the employer will NOT automatically withhold anything. Hardship withdrawals are not eligible to be rolled over and do not have automatic withholding like that. You can elect 0%, 20%, or even 30% to be withheld. You can also net up the distribution amount to account for the withholding…ie if you need 5k and you want 30% withheld then you would take $7,150 (assuming that you have that much in contributions of course).
October 22nd, 2009 at 12:49 pm
The hardship clauses in the 401k rules allow you access to the money. They do not, however, relieve you of the tax and penalty obligation.
Withdrawal of funds from a 401k, even to avoid foreclosure, is subject to ordinary income taxes plus a 10% penalty if you are not 59 1/2.
October 22nd, 2009 at 6:49 pm
This link to the irs website shows an example similar to yours. http://www.irs.gov/retirement/article/0,…
October 22nd, 2009 at 7:37 pm
Yes, you get to withdraw from it early for a hardship, but you still have to pay the 10% penalty.