401K hardship?

Question

I closed a 401K account with 20K in it and used 17K of it for medical bills. What IRS form would I use to claim that as a hardship so it is not treated as a early withdrawal ?

Answer 1

It will be treated as an early withdrawal and you must pay income taxes on the full amount of the distribution however you may be able to avoid the additional 10% penalty tax on the portion of the distribution that was used to pay qualified medical expenses that exceed 7.5% of your Adjusted Gross Income.

File Form 5329 with your tax return to report the distribution and claim the exception for the 10% tax for the qualified medical expenses. Here's a link to the instructions for Form 5329: http://www.irs.gov/pub/irs-pdf/i5329.pdf and here's a link to the Form 5329: http://www.irs.gov/pub/irs-pdf/f5329.pdf

You'll have to do some calculations to determine how much of the distribution can avoid the 10% penalty tax. For example, if your AGI is $20,000, the 7.5% limit is $1,500. The first $1,500 of the distribution would be subject to the 10% penalty but the remainder of the distribution would not be as long as it was used to pay qualified medical expenses.