Tax Tips

59½) a 10% penalty for the early withdrawal.

Now, I recommend that you look for every possible way to get by without having to withdraw from your 401K or other retirement plan. However, if you must withdraw from your 401K, there are three ways to do it:

1. Regular Distributions – You are taxed at ordinary tax rates plus the 10% penalty if you are under age 59½.

2. Plan Loans – You can borrow up to 50% of your 401K’s value. The amount you can borrow is capped at

$50,000 and must be paid back to your 401K plan over a 5 year period.

You must pay interest on the loan as well.

If you fail to repay the loan or leave your employer with an unpaid loan balance, the unpaid loan is treated as a regular distribution.

3. Hardship Withdrawals – A hardship distribution from a 401K can be made only because of an immediate and

heavy employee financial need.

Hardship distributions are subject to ordinary income tax rates and the 10% early withdrawal penalty.

The following types of expenses qualify as hardship withdrawals taxed at ordinary income tax rates but are NOT subject to the 10% early withdrawal penalty:

a)   Medical expenses that exceed 7.5 percent of adjusted gross income.

b)   Qualifying first time homebuyer purchases (capped at $10,000).

c)   Qualified higher education expenses.

d)   Disability.

e)   Expenses to delay or prevent foreclosure with respect to a principal residence.

f)   Expenses to pay for casualty damage to your principal residence.

Joe

Learn more about Joe DePetris, Jr., and IBO tax return preparation and tax issues at IBO Bookkeeping 101.

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This article is provided as an educational resource for your guidance, and is strictly informational. It does not constitute legal, accounting, or other professional counsel. Nothing included herein implies a recommendation by the author, the IBOA International, or Amway Global, of any course or method of regulatory compliance. Readers and users who intend to take, or refrain from taking, any action based on information contained herein should first consult with their qualified tax advisor, preferably a C.P.A., or appropriate regulatory authorities.