We withdrew money from our 401K this year because my husband lost his job and we have medical bills that exceed 7.5% of our taxable income. Here are my questions...

1) I understand that the PENALTY will be waived due to the medical hardship, but will we still have to pay taxes on this money?

2) What kind of record do we need to provide (if auditted) that shows we used the early distributions to pay off medical debt?

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Originally Posted by Questions_2008

We withdrew money from our 401K this year because my husband lost his job and we have medical bills that exceed 7.5% of our taxable income. Here are my questions...

1) I understand that the PENALTY will be waived due to the medical hardship, but will we still have to pay taxes on this money?

2) What kind of record do we need to provide (if auditted) that shows we used the early distributions to pay off medical debt?

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1, Yes, you still have to pay ordinary income tax on the withdrawal. They should have withheld 20% when they sent you the distribution. Whether you will owe additional taxes will depend on your tax bracket. Also, if you live in a state with income taxes you will have to pay them as well. The 401(k) plan administrator will send you a 1099-R form at the end of the year, and it will show the amounts that you should include on your 1040 and state income tax forms.

2. You may have to include Form 5329 with your return, to show that the withdrawal is NOT subject to the usual 10% penalty. If the 1099-R form shows distribution code "1" on line 7, or line 7 is blank, then you will have to complete this form. You should also keep a record of the bills you paid.