401K Hardship Withdrawls

[Guest caddy1950]

Would back taxes typically qualify for a hardship withdrawl? Would there be a penality if the withdrawl was distributed directly to the IRS?

[stephen]

Typically back taxes would not qualify for a hardship withdrawal. The plan document may allow for it. I would suggest you contact the Plan Administrator.

I believe the 10% penalty would still apply if you are not at least 59 1/2 years old. Also, future slary deferral withholdings would be affected (no deferrals for 12 months under existing laws) and you would have to pay income tax on the distribution.

[Guest caddy1950]

Let me outline my plan of action:

My current 401K has a value of $50,000, this does not include

two loans valued at $15,000 total.

I intend on defaulting on the loans and taking the IRS penality. I will add this penality to the back taxes I owe of approx $25,000 and pay it all off with the hardship disbursement.

My justification for the hardship is that I canot afford to pay the IRS without losing my home. I have to pay the IRS somehow.

Any comment would be appreciated. Thanks

[stephen]

Is you account balance all from Salary deferrals?

Does the plan allow for hardship distributions from other sources?

Does the plan allow hardship distributions of earnings?

I am not a distribution expert: however what you propose even if you are allowed to do it by the plan will not relieve you of all of your tax obligations.

50,000 - 10,000 (20%) - 15,000 loan = 25,000.

This does not include state withholding (2,000 at 4%) if there is any, 10% penalty ($5,000) or the additional income tax (at least $4,000 if you are in the 28% tax bracket) to be paid with 2001 tax filing.

[Jon Chambers]

Qualifying event for HSWD would need to be threat of foreclosure on your home, leading to eviction. So, if you want to proceed with this course of action, you need the IRS to place a lien on your home, and to threaten to foreclose.

HSWD will probably be subject to the 10% penalty tax. However, HSWD available amount can be grossed up for taxes due.

Not sure why you want to default on your loans. This will only increase your tax burden with no incremental dollars to you. Also not sure you can electively default on your loan. Most loans are paid by payroll deduction. HSWD is generally not a good alternative, but if it's all you have available, you may want to take it. But if possible, pay back your loans, avoid additional taxes and penalties, and rebuild your retirement account.

[Guest caddy1950]

Thanks for the input.