HELP - I Want My 401(k) Retirement Money Back!
- Date: 2007-11-26 - Word Count: 621
Share This!
Here's the Internal Revenue Service's definition of a 401(k): "a tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pre-tax basis."
So, let's say you've got a nice 401(k) savings. What happens if you need to withdraw that money?
Early distributions are those that are received before age 59 ½. To discourage them, early distributions are subject to normal income tax plus a penalty of 10% additional tax unless one of the following occurs:
1. You die or become disabled
2. Your employment ends and you roll over the money directly to another qualified retirement plan
3. The plan ends for any reason including an IRS levy and no other plan is established or continued in its place
4. You need to pay for medical care up to the amount allowable as a medical expense deduction
5. The distributions are part of a series of substantially equal periodic payments over your life expectancy after you no longer work for the employer
Without one of these five conditions prior to reaching age 59 ½, the only way to withdraw money from your 401(k) without having to pay it back is to qualify for a Hardship Distribution.
So what qualifies as a financial hardship under the IRS's rules? First of all, individual plans can vary greatly from employer to employer.
If you own a business or manage a retirement account for employees, you need to become familiar with your plan. Many companies may have a 401(k) plan without really understanding all the details.
So if you think you might qualify for a Hardship Distribution from your 401(k), ask your employer if the plan allows for these distributions at all.
Employers must adhere to the strict guidelines of their plan documents and can not make loans or Hardship Distributions if the plan doesn't allow for them.
If your employer doesn't know the answer or seems unwilling to research this for you, ask them for a copy of the plan. All participants are entitled to receive the plan document in writing.
If your 401(k) plan does provide for Hardship Distributions, here are the requirements:
(1) the withdrawal must be due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401(k) plan; and (5) you can't contribute to the 401(k) plan for six months following the withdrawal.
The amount you can withdraw is usually limited to the amount of your elective deferrals only. This would not include any income earned on the deferred amounts or money matched by the employer.
The following items are considered by the IRS as acceptable reasons for a Hardship Distribution:
1. Medical expenses for you, your spouse, or dependents
2. Purchase of a primary residence or repair of a primary residence
3. College tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents
4. Payments necessary to prevent eviction from your home, or foreclosure on the mortgage of your principal residence.
5. Funeral or burial expenses for immediate family members.
You do not have to pay the withdrawal amount back to the 401(k) account. However, as I mentioned previously, you can't contribute to the 401(k) plan for six months following the withdrawal.
So when investing in a retirement account don't think of it as a regular savings account. You won't be able to get that money back into your hands before age 59 ½ without a significant penalty or hardship that you can prove.
So, let's say you've got a nice 401(k) savings. What happens if you need to withdraw that money?
Early distributions are those that are received before age 59 ½. To discourage them, early distributions are subject to normal income tax plus a penalty of 10% additional tax unless one of the following occurs:
1. You die or become disabled
2. Your employment ends and you roll over the money directly to another qualified retirement plan
3. The plan ends for any reason including an IRS levy and no other plan is established or continued in its place
4. You need to pay for medical care up to the amount allowable as a medical expense deduction
5. The distributions are part of a series of substantially equal periodic payments over your life expectancy after you no longer work for the employer
Without one of these five conditions prior to reaching age 59 ½, the only way to withdraw money from your 401(k) without having to pay it back is to qualify for a Hardship Distribution.
So what qualifies as a financial hardship under the IRS's rules? First of all, individual plans can vary greatly from employer to employer.
If you own a business or manage a retirement account for employees, you need to become familiar with your plan. Many companies may have a 401(k) plan without really understanding all the details.
So if you think you might qualify for a Hardship Distribution from your 401(k), ask your employer if the plan allows for these distributions at all.
Employers must adhere to the strict guidelines of their plan documents and can not make loans or Hardship Distributions if the plan doesn't allow for them.
If your employer doesn't know the answer or seems unwilling to research this for you, ask them for a copy of the plan. All participants are entitled to receive the plan document in writing.
If your 401(k) plan does provide for Hardship Distributions, here are the requirements:
(1) the withdrawal must be due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401(k) plan; and (5) you can't contribute to the 401(k) plan for six months following the withdrawal.
The amount you can withdraw is usually limited to the amount of your elective deferrals only. This would not include any income earned on the deferred amounts or money matched by the employer.
The following items are considered by the IRS as acceptable reasons for a Hardship Distribution:
1. Medical expenses for you, your spouse, or dependents
2. Purchase of a primary residence or repair of a primary residence
3. College tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents
4. Payments necessary to prevent eviction from your home, or foreclosure on the mortgage of your principal residence.
5. Funeral or burial expenses for immediate family members.
You do not have to pay the withdrawal amount back to the 401(k) account. However, as I mentioned previously, you can't contribute to the 401(k) plan for six months following the withdrawal.
So when investing in a retirement account don't think of it as a regular savings account. You won't be able to get that money back into your hands before age 59 ½ without a significant penalty or hardship that you can prove.
Related Tags: personal finance, 401k, retirement plans, saving for retirement, rules for 401k plans, defined contribution plans, 401k article, what is a 401k, qualified retirement plans, 401k investment, 401k withdrawal, 401k hardship distribution, tax deferred retirement
Laura Adams is the host of the popular MBA Working Girl Podcast. The content combines brainy business school theory with real-world business practice from her career as a business owner, manager, consultant and trainer. Subscribe for FREE to this top-rated show and get the useful MBA Essential Tip athttp://www.mbaworkinggirl.com Your Article Search Directory : Find in Articles
Recent articles in this category:
- The Secrets to Getting Low Down Payment Car Insurance
Upon purchase of a new car, there is almost always a requirement to buy an auto insurance policy as - The Wisdom Behind Auto Insurance Comparison Quotes
No one in his right mind would not go for a good deal. In fact, everyone is out on their feet and ru - The Benefits of Auto Insurance Comparisons Florida
Insurance can be expensive. This is something everyone knows about especially in the sunny state of - Auto Insurance Florida: The No-Fault Policy
There are different kinds of car insurance offered by a wide range of providers today. Different sta - Finding the Cheapest Auto Insurance Companies
Everyone is asking and searching for the cheapest auto insurance companies available today. Consider - How do You Compare Private Health Insurance Cover in Australia?
Deciding what is the best and most affordable private health insurance cover can be easy if you take - How Payment Protection Insurance Was Mis-Sold
For over six years the issue of Payment Protection Insurance (PPI) and how it was mis-sold to custom - Finding Quotes For Auto Insurance Online
One of the many concerns when you are shopping for auto insurance is being able to get access to quo - How You Can Find the Best Auto Insurance Online
When it comes to renewing your car insurance you are going to quickly discover that there are a numb - Guidelines For Searching For Auto Insurance Online
The internet can be a great source of discounts and values related to auto insurance. However, many
Most viewed articles in this category:
- Trading Forex With Pivot Points
Forex Pivot Point Trading are used today by Forex Traders and are calculated on the previous days mo - Where To Search For Free Grants
Where do you look for free grants? The search must be thorough or it could be an exercise in futilit - The Connection Between High Blood Pressure and Salt
We are a society of Salt Addicts. It cannot be denied. When you look at the things we do and the pla - Tips For Avoiding HYIP Scams
Before knowing about HYIP Scams, refer to the functioning of HYIP or "High Yield Investment Programs - Getting Credit After Bankruptcy
Consumers do not have to live sans credit following a bankruptcy. By following certain steps consume - Tips For Choosing A Credit Card
Are you looking for that perfect credit card? If so, you may be confused about what exactly to look - Cheap Car Insurance For Teens Online
Many elements determine a car insurance policy. Car insurance companies look at the person's age, hi - What Exactly Is Free Grant Money?
You can apply for free grant money from various government agencies. But where exactly does this mon - Small Business Owners Marketing and Customer Service
Marketing can be time-consuming, but it doesn't have to be hugely expensive now, thanks to the Inter - Apply Online For A Credit Card - How To Choose A Card?
The best type of credit card for you will be dependant on how you intend to use the credit card. Are