72t or hardship
Client is 59 at present but needs income. wont be 591/2 until Middle of Jan 2019
Husband divorced her and left her with income of only $502 per month and she has expenses of $1383 per month.
She got half of husbands 401k of 175k.
questions:
a. if we take an income, which she needs to pay her bills from now until she turns 591/2, would she have a good shot at claiming the hardship rule?
or
b. Should we use the 72t rule so she doesn’t have to pay the 10% penalty but she knows it will be for 5yrs?
Thank you
douglas
Permalink Submitted by Alan - IRA critic on Fri, 2018-08-31 02:13
Apparently a QDRO was filed with the employer. If she is allowed to take direct distributions from the 401k, they will be penalty free under the QDRO exception. It is not a good idea to start a 5 year rigid 72t plan when the taxpayer is only 5 months short of age 59.5. If she is allowed a distribution, she could simply take out the amount she needs for expenses till 59.5 penalty free, and roll the rest over to an IRA from which she can withdraw penalty free after 59.5.
Permalink Submitted by Douglas Bauerband on Fri, 2018-08-31 15:44
she didn’t want to have any problems with the 401k of 20% withholding or dealing with the HR people. She rolled her QDRO into an IRA and took 20k to pay off bills since the divorce back in November 2017. she only gets $503 in SSD per month. She needs a distribution monthly before she turns 591/2.not trying to ask you what to do but would she have a good chance at the hardship rule due to her income and expenses (expenses are just what she needs to get by each month nothing else).thank you, Doug
Permalink Submitted by Alan - IRA critic on Fri, 2018-08-31 18:28
A hardship distribution is only possible with a qualified plan, not with an IRA account. Now that the money is in her IRA she has also lost the QDRO penalty waiver since that also does not apply to IRA accounts. First, the possibility of qualifing for any of the IRA penalty waivers should be checked out, but she probably does not have any. A SEPP could be established, but it must last 5 years. Could be the best option is to just take out as little as possible until 59.5 and pay the penalty. Further, a SEPP generates only about 5% of the IRA account balance a year, and that may not meet her needs. Paying only a 10% penalty is not too bad if she does not owe taxes in addition. She gets a 12k standard deduction this year.