Retirement tax questions


@DanPaul02 wrote:

hardship withdrawal from a participant’s elective deferral account can only be made if the distribution meets two conditions.

 
  • It's due to an immediate and heavy financial need.
  • It's limited to the amount necessary to satisfy that financial need

A hardship withdrawal can be taken without a penalty. For example, taking out money to help with economic hardship, pay college tuition, or fund a down payment for a first home are all withdrawals that are not subject to penalties, though you still will have to pay income tax at your regular tax rate.

You will not pay a penalty on the withdrawal, but will pay tax on the money.  The Cares Act also gives the option of paying the taxes on the withdrawal over a three year period. 

You can withdraw up to $100,000 without a 10% early withdrawal penalty.


Hardship withdrawals are NOT exempt from the 10% early withdrawal penalty unless the taxpayer qualifies for an exemption under the normal rules, and education is NOT an exemption for 401(k) distributions.

https://www.irs.gov/retirement-plans/401k-plan-hardship-distributions-consider-the-consequences

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

 

Also, the CARES act provision waiving the penalty and allowing tax on withdrawals to be spread out over 3 years only applies to COVID-related hardships and that provision expired 12/31/2020, despite articles on the web to the contrary.