401K Hardship Rules and Penalties?

Question

I just had to quit my job unexpectedly. I want to cash my 401K in so I can pay my rent! This acct is from a previous job I had a few years ago. It has about $4000 in it. I am not sure what the penalties and guidelines are for a hardship loan/withdrawl? I need the $ quickly.

Answer 1

First, you have to prove and document your hardship and provide evidence that it can't be cured through other financial means. You will be taxed at ordinary income for all of your withdrawls and also face an additional 10% penalty tax.

Generally, hardship distributions from a 401(k) plan are limited to the amount of the employee's elective deferrals only, and do not include any income earned on the deferred amounts. Hardship distributions are not treated as eligible rollover distributions.

A distribution may be deemed to be immediate and heavy financial need, if the distribution is for payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.

You can only withdraw as much as can cover the immediate financial need (no more) and only if you have no other assets, either owned by you, your spouse or minor children accessible to you.

Also, a hardship withdrawl is subject to income taxes withheld against those contributions and a 10% penalty tax. This means it may not be worth it to take your hardship withdrawl.

You can contact your old plan sponsor about taking a loan from your 401k, which is tax-free as long as you are able to pay it back. Repayment should be outlined in your plan documentation, but is a 5year term, so the repayments may be very high.

Answer 2

If you're no longer working for the employer who sponsors the 401k plan then a loan or hardship is not available. You are now allowed to simply withdraw the money and close the account.

If you rollover the balance to an IRA or other 401k then it is not taxable. But, if you withdraw the money then 20% will be removed right off the top for federal taxes. Also, if you're under age 59 1/2 you'll have to pay an additional 10% early withdrawal penalty. You will also claim the gross amount of the withdrawal on your 1040 tax return next year and if they 20% that was withheld is not enough to cover your tax liability then you will have to pay additional tax (depends on what tax bracket you are in). The 10% penalty is paid when you file your 1040, it is not withheld from the payment. And finally, depending on what state you live in you might have to pay state income tax on the withdrawal amount.

Hypothetically say your account balance is $4,000 and you decide to withdraw that amount. $800 is withheld right off the top for federal taxes (20%). The 10% penalty is on the gross amount, not the net amount that you receive, so that's an additional $400 penalty that you'll pay with your tax return. At the very least you'll be paying $1200 in taxes and penalties.

If you are another employer you should check with them to see if they accept rollovers. If they do, roll it in to their plan and then take a loan against the amount.

Answer 3

It's not worth it! I just cashed out my 401K last year, and now I am paying for it. Mine was a lot more than $4,000. I know they hold 20% for taxes and then you get taxed on it even more when you actually do your taxes...almost like an early withdrawl penalty. Don't do it!!

Answer 4

As it was from a previous job, you can no longer get a loan from it. Loans have to be paid be though payroll and, if you no longer work there, that is not possible.

It is probably possible to cash it out but then you would be subject to federal income tax, state income tax, and a 10% federal penalty.