401k distrubution penality due to financial hardship?

Question

My sister was working full time. She lived with my mother and the two of them co owned a home. My mother died unexpectedly and left my sister to make all the payments. she went back to work ( insurance castastorpe claims adjuster) and all the bills she was left with she became ill , due to stress, and has been diagnosed with ulcerative colites. She was hospitalized for some time. While on disability she was informed that her position was being terminated. she was offered a severance package but told either she could stay on, Without pay and disability ran out, and keep insurance or leave and take the severance package. She took the severance package and did not recieve anything for 2 to 3 months and was behind on bills. She borrowed money from family and friends to cover essential bills but fell further and further behind. she recieved her 401k money and used most of it to cover her behind bills. Is this enough to help her avoid the 10% penality and how should she file.

Answer 1

Unfortunately, withdrawals due to financial hardship before age 59-1/2 generally incur the additional 10% tax, unless the person is totally and permanently disabled. If she's been declared totally and permanently disabled, not just that she was temporarily disabled and lost her job during that time, she can probably get out of the penalty.

Download publication 575 from irs.gov for more info.

Answer 2

401k difficulty Withdrawal: What in the adventure that your enterprise doesn’t furnish 401k loans or you're no longer eligible? it would nonetheless be available which you would be able to get admission to funds if here 4 situations are met (be conscious that the government does no longer require employers to offer 401k difficulty withdrawals, so which you would be able to examine along with your plan administrator): a million. The withdrawal is needed using a right now and intense financial want 2. The withdrawal is had to fulfill that want (i.e., you are able to’t get the money someplace else) 3. the quantity of the internal maximum loan does no longer exceed the quantity of the want 4. you have already gained all distributable or non-taxable loans available below your 401k plan If those situations are met, the money might properly be withdrawn and used for between here 5 purposes: a million. a regular abode purchase 2. larger coaching training, room and board and expenditures for the subsequent 12 months for you, your better half, your dependents or babies (notwithstanding in the event that they're now no longer based upon you) 3. to sidestep eviction out of your place or foreclosure on your regular place of abode 4. intense financial difficulty 5. Tax-deductible scientific expenditures that are no longer reimbursed for you, your better half or your dependents All 401k difficulty withdrawals are concern to taxes and the ten-p.c. penalty. this means that a $10,000 withdrawal can consequence in no longer purely severely much less funds on your pocket (probable as low as $6,500 or $7,500), yet motives you to forgo continuously the tax-deferred growth that would have been generated by ability of those sources. 401k difficulty withdrawal proceeds can't be decrease back to the account as quickly as the disbursement has been made.

Answer 3

If your sister is going to be 55 (at least) at any point in the year of termination, the withdrawal will not be subject to the 10% penalty. Also if her out-of-pocket medical expenses exceed 7.5% of her Adjusted Gross Income for the year, the amount of 7.5% will not attract a penalty either (this applies whether she itemizes or not). She will have to file form 5329 to make the necessary claims.

In any case, she will still have to pay tax on the income but 20% should already have been withheld anyway.

Answer 4

You dont get penalized for drawing from your 401k for financial hardship. Have your account fix your year end filings to reflect that