Ask Me Help Desk - Hardship withdrawal From 401k

SITUATIONAL INFORMATION:

I haved worked for this company for 10 years, and they are closing up shop in the US on Jan 28. I have approx. 25,000 in the 401K, half of which is out in loans to myself, and the other half the 401K company says I am eligible to withraw as a hardship. My hardship is that my home is in foreclosure(5500.00 worth). I have requested the full amount for the hardship, but I have to send in documentation which I have. I also have some unpaid medical expenses I can document.

My house will be paid off in less than 3 more years. It is on an interest free loan, and is valued at approx 95,000. I cannot get a line of credit, nor borrow against it, due to bad credit, late house payments, and the type of loan it is. I would like the full amount to pay the house payments ahead.

I AM MAKING A HARDSHIP WITHRAWL FROM 401K AND NEED TO KNOW THE FOLLOWING:

Will they give me the full amount requested(13,000) with 5500.00 listed as the foreclosure?

Will I have to add medical bills to get more? Can I?

Will they take into fact they lay off on Jan. 28 to my favor, or would that work against me?

Any other ideas?

ps... At worst would I be able to withdraw the remainder with penalties?

The one thing to beware of is that there may be a box to check, indicating whether you want taxes to be taken out. Read it carefully before checking or not. If you do NOT want taxes taken it at this time, you may be able to get the whole amount. It likely means you'll be taxed at the end of the year instead.

If you don't need all of the money, can you roll some of it into a new retirement program, i.e. IRA?

So can I get the full amount that I requested if the foreclosure letter only states $5500. I am requesting 13,000?

The plan sends the check to you. You then use it as needed. Your situation does seem to qualify as a hardship withdrawal (see WC Administrators - 401k distribution options: rules for hardship withdrawals.). But that just means the 10% penalty is waived. You will still be responsible for taxes.

Quote:

Originally Posted by ScottGem

The plan sends the check to you. You then use it as needed. Your situation does seem to qualify as a hardship withdrawal (see WC Administrators - 401k distribution options: rules for hardship withdrawals.). But that just means the 10% penalty is waived. You will still be responsible for taxes.

Does the foreclosure letter have to specify it is 13,000.00 behind in payments for me to get the full amount? For instance the forelosure letter states that I am 5500.00 behind in payments. Does that mean that is all they will give me out of the 401K for the hardship?

The siter I linked to list several reasons. You can total up all the reasons and request that amount. Or you can wait until you get the distribution on termination. You CAN withdraw the entire balance, but any amounts over what you can document as hardship will probably be subject to the 10% penalty.

Quote:

Originally Posted by ScottGem

The siter I linked to list several reasons. You can total up all the reasons and request that amount. Or you can wait until you get the distribution on termination. You CAN withdraw the entire balance, but any amounts over what you can document as hardship will probably be subject to the 10% penalty.

Ok, here is what Fidelity sent me:

Withdrawal Details

Your request to withdraw $12,931.26† is pending but not yet processed.
Fidelity Investments will send your paperwork. You can expect to receive it by 12/29/2006.

After your paperwork is received in good order and approved, you should expect to receive your money in 3 - 5 business days.

So, if I send in the foreclosure letter, and whatever medical bills I can find, they will issue a hardship withdrawl check for that amount, and then I could just take the rest as a withdrawl(paying the penalty and the high withholding tax)? If so, do I have to wait until the company closes?

TY,
Jeff

OK, first, there is no such thing as a withholding tax. The law requires a plan admin to withhold 20% of a plan distribution unless you request otherwise. This amount is the same as the witholding from your paycheck. Its an advance against your taxes. When you file your 2007 return the total amount wihheld is then applied towards the amount of taxes you owe, resulting in a bill or a refund.

Second, I don't think you need to send anything to Fidelity other than the forms they send you. You don't have to prove hardship to them, but to the IRS when you file your return for the year. If you take a withdrawal or a distribution before 59 1/2 then you need to pay a penalty on any amounts that won't qualify for hardship. This will include the outstanding loan balance.

P.S. Just post followups in the thread here. No need to e-mail me, I'm automatically informed when you post a response.

Quote:

Originally Posted by ScottGem

OK, first, there is no such thing as a withholding tax. The law requires a plan admin to withhold 20% of a plan distribution unless you request otherwise. This amount is the same as the witholding from your paycheck. Its an advance against your taxes. When you file your 2007 return the total amount wihheld is then applied towards the amount of taxes you owe, resulting in a bill or a refund.

Second, I don't think you need to send anything to Fidelity other than the forms they send you. You don't have to prove hardship to them, but to the IRS when you file your return for the year. If you take a withdrawal or a distribution before 59 1/2 then you need to pay a penalty on any amounts that won't qualify for hardship. This will include the outstanding loan balance.

P.S. Just post followups in the thread here. No need to e-mail me, I'm automatically informed when you post a response.

Thanks for all your help here, and keeping me straight on the email(new to this).

The paperwork I got from Fidelity says the following:

If you wish to execute this withdrawl transaction, please

* Review the application carefully, noting the expiration date
* Sign the application form
* Keep a copy for your files
* Submit the application to Fidelity Investments as soon as possible

[paraphrase] Any loans etc., taht have not already been processed already, may be affected by this request.

[then it says] Required documentation forn In-Service Hardship Withdrawl:

[then it just list all the reasons and documentation needed]

Fidelity will:
* Review the application and approve your request. If there are any questions regarding your application, Fidelity will contact you.
* Execute the transaction
* Send the check to you or send teh withdrawl amount by EFT.

The more I look at it, the more it looks like they just want the application back signed, and it sounds like they are just saying that I need the documentation for the IRS. However, I did call and talked to, just a regular phone rep, and I asked her, and she said to hold on while she checked, then she came back and said yes I need to send all of then documentation in(but she didn't sound to confident).

So do you think I should just overnight the application without the documentation and see what they say?

Sorry to be a pesky bother!

When I was administering 401K plans (which was a while ago) we didn't require the documentation. Maybe the rules have changed or Fidelity is more a stickler on the rules.

If their forms say you need to provide the documentation, then provide it. I'm not sure if they will only issue a check for the documented amount of expenses, probably they will.

Quote:

Originally Posted by Jeff930

SITUATIONAL INFORMATION:

I haved worked for this company for 10 years, and they are closing up shop in the US on Jan 28. I have approx. 25,000 in the 401K, half of which is out in loans to myself, and the other half the 401K company says I am eligible to withraw as a hardship. My hardship is that my home is in foreclosure(5500.00 worth). I have requested the full amount for the hardship, but I have to send in documentation which I have. I also have some unpaid medical expenses I can document.

My house will be paid off in less than 3 more years. It is on an interest free loan, and is valued at approx 95,000. I cannot get a line of credit, nor borrow against it, due to bad credit, late house payments, and the type of loan it is. I would like the full amount to pay the house payments ahead.

I AM MAKING A HARDSHIP WITHRAWL FROM 401K AND NEED TO KNOW THE FOLLOWING:

Will they give me the full amount requested(13,000) with 5500.00 listed as the foreclosure?

Will I have to add medical bills to get more? Can I?

Will they take into fact they lay off on Jan. 28 to my favor, or would that work against me?

Any other ideas?

ps.... At worst would I be able to withdraw the remainder with penalties?

While so called gurus always have one aswer, "Do Not Touch The Money", it can cost you more in the long run if you do not touch the money. While times may be tough, it would not take long to have someone to a break even analysis with you. Don't expect this from HR Block or other companies. Use someone who has earned a CPA and can lay it out for you. Show them all of your information and negotiate the price of the analysis up front. What good is a retirement account if it was at the expencse of losing your house? Figure it out with some help. It will be worth your time.