Let's say I withdraw 10k from my 401k plan to pay for medical expenses and I ended up using only 8k. What should I do with the left over amount? Does the IRS want you to place the unused amount back in your plan? Also, besides the 10% penalty, is there any other penalty at tax time? Thanks for your help.
2006-09-13 06:36:25 · 6 answers · asked by william k 2 in Business & Finance ➔ Taxes ➔ United States
You have to claim what you take out as ordinary income + pay the penalty. In addition, when you take the $10k out, the holder of the 401K will take 20% off the top for taxes, so you will only receive $8k, so if you want to replace $2k, you will have to do so with "fresh money".
If you pay it all back before the end of the fiscal year (dec 31), then you will not have to have any penalty - it's a rarely used piece of the tax law.
A better avenue is to take a "loan" on your 401k, because then they don't do the tax hit, and you only have to take out what you need, and you can pay it back over a 5 or 10 year period, depending on the need. The only "excess distribution" would be if you defaulted on that loan.
2006-09-13 06:41:37 · answer #1 · answered by Anonymous · 2⤊ 0⤋
First, your plan would have to permit hardship withdrawals and you would have to provide the Plan Administrator with information so that they know you qualify. Taxes would be withheld at 20% unless you request more be withheld. You may not make contributions to the plan for 6 months or 12 months after making a hardship withdrawal (depending on the plan elections), so your only option is to roll it over into a rollover IRA within 60 days from the original withdrawal to lessen your tax bite and penalty.
2006-09-14 09:06:57 · answer #2 · answered by Andreas 3 · 2⤊ 0⤋
The entire amount of the withdraw is subject to tax as ordinary income no mater why it was withdrawn. Medical expenses are deductible as itemized deduction to the extent they exceed 7.5% of AGI. I couldn't tell if you can but any leftover bank in the plan or not. The link below is an IRS document related to 401(k)s and mentions hardship withdraws. It may help.
2006-09-13 13:17:55 · answer #3 · answered by STEVEN F 7 · 1⤊ 0⤋
There isnt a penalty as long as its qualified medical expenses. The other 2000 put back or rollover to another account within 60 days and no penalty.
2006-09-13 12:11:51 · answer #4 · answered by linluv2001 2 · 1⤊ 0⤋
Personally, I would either put the 2K back in the 401K or I would pay off other things that were overdue if you cannot put it back.
2006-09-13 06:38:59 · answer #5 · answered by tottasis 2 · 2⤊ 0⤋
Usually, you have to present your plan administrator with proof of how much you owe, and you are only allowed to withdraw that amount. You usually aren't allowed to just take out an arbitrary amount.
2006-09-13 06:41:12 · answer #6 · answered by kalaka 5 · 2⤊ 2⤋