Will a 401K hardship loan cause us to pay in the next tax bracket for a whole years of pay or only on the amount we take out? Will elect to pay 10% Fed. & Stae up front.

[ToddL · Accepted solution]

When you move into a new tax bracket, the higher tax rate only applies to the amount of income that is in the new bracket. 

For example, if a hardship withdrawal takes you $10,000 above the top income for your previous bracket, then only the additional $10,000 is taxed at the higher rate. The attached chart provides a more detailed explanation and example

A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.

If you are referring to a 401K loan, you won't get a Form 1099-R and won't pay any tax or penalty unless you fail to repay the loan in accordance with its terms  (see "retirement plan loan" below).

A retirement plan loan must be paid back to the borrower’s retirement account under the plan. The money is not taxed if loan meets the rules and the repayment schedule is followed. Only on the amount you take out, and maybe not even the entire amount.

 

[sheshybug]

Thank you for your response and the attachment. This was very helpful!!

[ToddL]

My pleasure!