401k penalty provisions

[Guest rwestrup]

Is it ever a good idea to use 401k proceeds, after loosing a job, to pay down debt or pay off a second mortgage so as to lower monthly expenses? Are there any circumstances where the penalty doesn't apply? (assuming under age 59 1/2)

[david rigby]

IRS Publication 590 might provide some assistance. http://ftp.fedworld.gov/pub/irs-pdf/p590.pdf

Beginning on page 32:

Early Distributions

You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later.

Early distributions defined.

Early distributions are amounts distributed from your traditional IRA account or annuity before you are age 59-1/2 , or amounts you receive when you cash in retirement bonds before you are age 59-1/2 .

Exceptions. There are several exceptions to the age 59-1/2 rule. You may qualify for an exception if you are in one of the following situations.

• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

• The distributions are not more than the cost of your medical insurance.

• You are disabled.

• You are the beneficiary of a deceased IRA owner.

• You are receiving distributions in the form of an annuity.

• The distributions are not more than your qualified higher education expenses.

• You use the distributions to buy, build, or rebuild a first home.

• The distribution is due to an IRS levy of the qualified plan.