401k Early Withdrawal Penalty

[fidu]

10 percent penalty if you take withdrawal from your 401 k prior to retirement age.

Under what circumstances is the penalty waived?

i know for financial hardship - first time home buyer exemption? what else can be legitimized to avoid the penalty???

thanks in advance.

[pmacduff]

If you're referring to the 10% excise penalty...it applies to withdrawals prior to age 59 1/2 which may or may not be the Normal Retirement age in the Plan. I also think there are very few exceptions... although total and permanent disability comes to mind. I could be wrong and have maybe not read up on all the new rules, but I do not think the 10% is waived for hardships or first time home purchases...at least from a Qualified Plan. Anyone else out there better versed than I in the new rules?

[R. Butler]

1. Death

2. Disability

3. Substanially equal periodic payments after termination

4. Participant at least 55 and termianted

6. Amount not in excess of deductible medical expenses under 213

7. Distribution due to IRS levy

8. QDRO payment to alternate payee

9. Corrective distributions

10. Certain ESOP dividends.

I am fairly sure that first time honebuyer exemption only applies to IRA's (could be wrong).

These are found in 72(t)(2)(A)-(F).

http://benefitsattorney.com/cgibin/framed/...?ID=304&id==304

[MGB]

The 10% additional tax is NOT waived for hardship. Any hardship distribution prior to 59-1/2 has normal tax applied plus the 10%. Also, there is no waiver for home purchases.

There are no new rules, they have been the same for a long time. Read Section 72(t)(2) of the Code.

1. over 59-1/2 (retirement age in plan is irrelevant)

2. beneficiary upon death of employee

3. distribution due to disability

4. substantially equal payments over life

5. paid on account of separation of service after age 55

6. stock dividends under 404(k)

7. certain tax levies on the plan

8. to pay for medical expenses that could be deducted under 213 of the code

9. alternate payees under a QDRO

10. to pay for health insurance premiums of unemployed (I beleive the details were changed on this in a bill this year).

There are additional exceptions for IRAs that do not apply to qualified plans, such as higher education and first-time homebuyers.

[pmacduff]

Thanks for the detail MGB - I was confident in the old rules which, as you say, have been in effect a long time. With all these new things changing..I thought maybe I had missed something !

[fidu]

thanks to all.

so would the 10% be applicable to employee as well as employer match vested amounts in the participants account?

[R. Butler]

It applies to employer matching contributions.

[MGB]

It also applies to all investment returns and pre-tax deferrals. The only thing it does not apply to is the amount of after-tax contributions...the income on them are still subject to taxes.

A very easy rule: Whatever portion of the distribution is taxable, the 10% additional tax also applies to.

[Brian Gallagher]

it applies to ALL money distributed under 59 1/2. don't forget, defaulted loans are included, too.

[MGB]

Brian, it is only the taxable portion. Return of after-tax contributions is not subject to the additional tax.

Read 72(t)(1): "...shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income."

The return of after-tax contributions is not "includible in gross income."

[fidu]

The plan administrator informed me that the 20 % withholding DEFINITELY applies to any withdrawal whenever it is made,

BUT there is an exemption to the 10% early withdrawal penalty for first first time homebuyers up to a maximum of $10,000 withdrawal.

anyone hip to this rule????

[R. Butler]

The first-time homebuyer exemption applies to IRA's only, not to qualified plans. I was only fairly certain in a prior post, but now I am more than fairly certain.

[fidu]

ok folks, there seems to be something that were missing.

many many plan administrators are permitting this w/d, not as a loan, but as a distribution, but no penalty.

im a bit troubled as to what code section permits this.

[MGB]

The only ones missing anything is the plan administrator.

As I said before, read Section 72(t) of the Code. It is very clear.

[pmacduff]

fidu - Is it possible that you are confusing the fact that the Plan is not required to withhold the 10% upfront? (only the 20% mandatory Federal is required to be withheld). But when the individual files the 1040 return, they are required to report the Qualified Plan distribution and there is a line item for the 10% excise tax if the taxpayer is not yet 59 1/2. Could this be the issue?

[mbozek]

IRC 72(t)(2)(F) permits a distribution for first time home buyers exempt from the 10% penalty tax only from IRAs.

[Brian Gallagher]

mgb-- thanks for correcting my oversight before.

fidu-- the 20% withholding does not apply to EVERY distribution, only distributions that would otherwise be eligible for qualified rollover status.

for example, returns of excess, QDRO payments to a non-spouse, after-tax money (gross), and annuity payments are not eligible for rollover, thus there is no mandatory w/h

[fidu]

Very much obliged for the input.

It is my understanding that the administrator has been providing some less than accurate guidance to participants regarding the penalty.

Thanks to all.

Enjoy the weekend.

[Guest SpencerB]

10 percent penalty if you take withdrawal from your 401 k prior to retirement age.

Under what circumstances is the penalty waived?

i know for financial hardship - first time home buyer exemption? what else can be legitimized to avoid the penalty???

thanks in advance.

Check out this list of 401k withdrawal rules.

[BG5150]

10 percent penalty if you take withdrawal from your 401 k prior to retirement age.

Under what circumstances is the penalty waived?

i know for financial hardship - first time home buyer exemption? what else can be legitimized to avoid the penalty???

thanks in advance.

Check out this list of 401k withdrawal rules.

SPAM ?? Who drags up a 7 yr old post?