What about my 401k ????

Question

I may be put on permanent disability in a month, I've been on short term dis up to this point for back surgery, I had a 3 level fusion done and can't do what I was doing before..............what do I do??? Can I roll some of it into an IRA and take some of it to pay bills, house payments etc? I have 17 years worth of investment in it. What will the penalties be?

Answer 1

What are the rules regarding hardship withdrawals from my 401(k)?
Hardship withdrawals are allowed by law but your employer is not required to provide this option in your plan. The cost of administering such a program can be prohibitive for many small companies. Your summary plan description (SPD) will state whether or not your employer allows withdrawals in your plan.

The IRS code that governs 401(k) plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can’t contribute to the 401(k) plan for 12 months (only six months after January 1, 2002) following the withdrawal.

The following four items are considered by the IRS as acceptable reasons for a hardship withdrawal:

Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee’s principal residence.
Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
Hardship withdrawals are subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.

Answer 2

If your plan allows hardship withdrawals, your request will need to be approved either by a committee or a designated representative who has agreed to accept the legal responsibility for making the decision. Because there are a lot of legal issues surrounding hardship withdrawals, the approval process can be very strict; these are rarely "rubber stamp" decisions.

If the plan administrator allows frivolous withdrawals, "it's a plan-level problem that could result in the plan being disqualified," said Stone. Each plan that allows hardship withdrawals is required to spell out its own rules in the plan document. These rules can be tougher than the federal guidelines.

You may be required by your plan to explore several alternatives before you are approved, such as an IRA withdrawal or a commercial loan. Many plans require you to provide some sort of proof to document your financial need. This can include financial statements, eviction notices, or a notarized statement from an accountant. "Hardships are strictly for immediate and very heavy financial burdens," said Stone.

Remember that when you've been approved for a withdrawal, you're not off of the IRS radar screen. A hardship withdrawal is a taxable event, so you will have a mandatory 20 percent withholding tax taken out of the check. You may end up owing more, depending on your total income for the year. You may also be subject to the 10 percent penalty if you are under age 55.

Call your plan administrator.

Answer 3

It's usually 10% penalty on top of you regular taxes. However, I think there are 3 reason why they can wave the penalty and those are for your health, education or buying a house.

Answer 4

You have a couple of adequate answers but do yourself a favor and get a free consultation with a financial adviser and a tax person for added security and peace of mind.