Hardship Withdrawal
I was asked a question from someone who just quit their job. They have money in the 401(k) of their former employer and is 55 yrs old. They may need to some money due to economic hardship. I understand there is no exception to the 10% early withdrawal penalty from an IRA for economic hardship. Although they are no longer employed but have left the money in the employer plan, can they still use the hardship withdrawal provision in the plan to avoid the 10% penalty?
Permalink Submitted by Alan Spross on Tue, 2010-06-29 20:45
A hardship withdrawal is not exempt from the 10% penalty, but hardship withdrawals also end as of the date of separation.
However, for someone who separated from their employer in the year they reach 55 or later, there is NO early withdrawal penalty for distributions DIRECTLY from the plan of the employer they separated from. Therefore, this person will avoid the penalty. If he needs funds and also plans an IRA direct rollover, he needs to take the distribution prior to doing the rollover, as the penalty exception is lost for funds rolled to an IRA.