401(K) “Hardship Distribution”
List Mates –
Client needs funds to pay mortgage because she was recently let go from one of the former “Big 3”. She has a 401(K) and wants to know if she can take out a distribution under the hardship distribution/exception. Client is 35 years old. Questions:
1) I understand the distribution amount is limited to her elective deferrals through the years, correct?
2) What is the “relief” if one qualifies for the hardship distribution? i.e. no 10% penalty on the distribution? No income tax imposed on the hardship distribution? Other relief?
3) What is the process? Does she have to notify the plan administrator now that she’s claiming hardship or at tax time?
4) Depending on the “relief” offered, I assume she could technically take out the balance (the non “elective deferrals” portion) of the 401(k) and would be subject to the good ole’ 10% penalty and ordinary income taxation, correct?
Thanks in advance for any help you can provide.
Lousy economy, especially here in Michigan.
Regards,
Rob Gilbreath
Attorney and Counselor at Law
[email protected]
Permalink Submitted by Clyde Wolf on Fri, 2009-07-17 19:42
Your client’s desire for a hardship distribution from her 401k fits the need.
At best it is a short term solution unless she can pay off the mortgage in full.
Talk with the plan administrator, and read the Summary Plan Description. In the SPD, there will be descriptions when and how distributions from the 401k can be made.
Since the client is separated from the employer, she can probably take distributions at any time for any reason. But taxes and penalties will apply. Taking a $10,000 distribution and if the client is in the 15% tax bracket, taxes would be !,500. Add to that the 10% penalty of $1,000 the client would have $7,500 available for use.
If the client has an IRA she can take penalty free distributions from the IRA for several different reasons. Taxes would need to be paid. See IRS PUB 590 page 53 for a list of the penalty exceptions: http://www.irs.gov/pub/irs-pdf/p590.pdf
Permalink Submitted by Alan Spross on Fri, 2009-07-17 20:39
If this person has actually separated from service, a hardship distribution would not even apply since these distributions are basically exceptions to the general rule that plan assets cannot be distributed until separation from service. Once separated, the plan cannot deny distribution of the plan or complete direct rollover to an IRA.
As cwolf indicated, there will be ordinary income tax on distributions and the early withdrawal penalty will apply unless taxpayer meets one of the exceptions to penalty that apply to the type of plan from which the distribution is made. There is no exception however for mortgage payments. Perhaps she can refinance this mortgage to reduce the payments, but if she wants better access to these retirement funds, the direct rollover to an IRA is probably the way to go, and then take distributions from the IRA until she gets another position.