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Premature Distribution Penalty/Tax still due on hardship withdrawals?


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From what I read the 10% penalty is still due on a hardship withdrawal unless the participant is 59 1/2.  The participant asking for the withdrawal is only 40 and it is a construction expense (he said he over-built) for his prmary residence.  This is from a qualified plan.  Is there any relief from the 10% for this participant?  

I just want some more back-up because he is relentless on the WHY?

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Even if there is no duty to do so, some administrators and their service providers respond to a query of this kind.

One might invite the inquirer to look at the plan’s form for requesting other kinds of before-severance distributions—for example, a qualified birth or adoption distribution or qualified disaster recovery distribution—and ask whether a claim on the circumstances that allow a hardship distribution also would fit one of those other categories. That illustration might be most effective if one can say the plan provides all early-out possibilities tax law permits.

Or if the question is why doesn’t the Internal Revenue Code provide an exception from the too-early tax for my situation (or why does tax law impose a too-early tax), the 1970s reply was “write your Congress member.” A 2023 reply might be “neither of us was elected to Congress.”

I have had clients use Bri’s way of showing an inquirer relevant law, using not a secondary source but one published by the U.S. Government Publishing Office, so it looks “official”.

Until recently, that might have been awkward because the Office of the Law Revision Counsel of the United States House of Representatives had not yet edited the United States Code to follow Congress’s Act of December 29, 2022. Title 26’s section 72 now is recompiled.

I.R.C. (26 U.S.C.) § 72(t)(2) http://uscode.house.gov/view.xhtml?req=(title:26%20section:72%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section72)&f=treesort&edition=prelim&num=0&jumpTo=true#72_4_target

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Pammie, here are some links to the IRS website that you can send to the participant:

The first describes hardship withdrawal rules and mentions the possibility of paying a 10% excise tax:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions

The second is a detailed table of exceptions to the 10% excise tax on early distributions and references to the tax code:

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

You may want to point out the line that for Homebuyers.  There is no exception to the tax for distributions from a 401(k) plan for a Homebuyer, but there is an exception for distributions from IRAs for up to $10,000 for qualified first-time buyers (with a lot of rules is 72(t) defining a qualified first-time buyer).

I suggest everyone should at least bookmark or print the table of exceptions as a handy reference for when the 10% penalty is not applicable.

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