Hello. I have been unemployed for 5+ months now and I am in dire need to tap on my 401K now. I know I will get penalized and what not, but I wanted to see what the general community has to say about this?
1. Aside from the bank's fee and your regular taxes, are there any other deductions to consider?
2. Can I claim financial hardship for my 2007 taxes and kind of get away with the penalties?
3. If I need to pay those taxes back (which is most likely the case), can I arrange for a payment plan?
Thanks for your time.
2007-05-03 05:37:28 · 5 answers · asked by zaxxon 3 in Business & Finance ➔ Taxes ➔ United States
thomas m is mistaken, a 401(k) plan CAN'T allow loans after you leave the job. Since you are unemployed, I conclude you HAVE left the job. If you were still with the company and took a loan from your 401(k), and then left, the balance would be due in full within 60 days, or be treated as an early withdraw. I recommend nearly anything over an early withdraw. If you do take the withdraw, you will pay a 10% penalty plus tax as regular income.
2007-05-03 12:08:44 · answer #1 · answered by STEVEN F 7 · 1⤊ 0⤋
Borrowing from a 401k plan w/o a tax effect may be possible - but it depends on the plan...not all employers allow it. AND - I think it is RARE to allow a perosn to "borrow" from the plan after then have seperated from the company (that's because loans are supposed to be paid back). I've even seen some plans where an existing 401k loan was DUE in FULL when the employee terminated from the employer.
Some plans will not make partial distributions to ex-employees. Need to talk to your plan abou that.
Assuming you still wanted to get $ out of your plan, you would want to do a direct rollover to a self-directed IRA. You could then take distributions from the IRA - this can be done in pieces. You could also set up a 72t distribution schedule which will avoid the 10% early withdrawal penalty but you will have to take out money at least until you are 60.....the details are too long to go into here, and if you are young (under 50) you can't get out more than 4-5%/yr anyway. This may not be enough.
If you are not borrowing, the costs to take out the money are high. You can figure on at least 15% going to income taxes and another 10% early withdrawal penalty. And when you take money out, you have to remember to have the custodian with-hold $ (send it to the Feds) or you may be nailed with an additional penalty at tax time: under-with-holding.
No hardships allow you to get out of the penalties if the money is coming from an IRA - and if you are taking $ from a 401k the fact you are out of $ is not considered a 'hardship.'
You really want to find another way - anything. Taking $ out of a 401k plan early is like cutting off yout foot to lose weight.
2007-05-03 21:20:37 · answer #2 · answered by Richard of Fort Bend 5 · 0⤊ 0⤋
1. You will pay a 10% early withdrawal penalty on top of regular taxes.
2. In short, no, there is no way to claim hardship and not pay penalties unless you are disabled.
3. You can arrange for an installment agreement with the IRS, but they charge interest which I believe right now is around 10%.
In short, if you can avoid it, don't take the money out. Not only will you be penalized, but you will lose out on retirement savings as well. If you have to take it out to pay for food, shelter and other basics, I guess you have to. But if it's for anything else, consider eliminating the expense altogether.
2007-05-03 12:55:59 · answer #3 · answered by Kevin M 1 · 0⤊ 0⤋
You can borrow from your 401k and pay it back with no penalty and also they charge a very small interest rate. It's the best loan you can get. So do that before you take it forever. Also if you wait until you are 59and a half or older you can take that money with no penalty's. The penalty comes from the USgovernment they tax you when you take it out and when you pay your income tax. I 'v done it both ways and now I borrow instead of take. It's the lesser of 2 evils and you have to have income to survive. It has something to do with food.
2007-05-03 12:51:23 · answer #4 · answered by thomas m 5 · 1⤊ 3⤋
Yes you can tap it, but it is strongly not recommended because of a couple of things. a large penalty for early withdrawal and the taxes. You may take $10k out but the gooberment will take $5k if you don't pay it back in a one year period.
My ex-ex borrowed against hers and didn't pay it back, when she did taxes she got nailed.
The IRS doesn't give a rip about hard ship.
http://www.fairtax.org
2007-05-03 12:48:17 · answer #5 · answered by Anonymous · 0⤊ 2⤋