[midwestocean]

I am trying to access a 401K to take a hardship withdrawal.
The company has blocked this option from all employees, unless of course you leave.
It puts us in between a rock & a hard place, I don't want to leave so close to the potential of a promotion, but can't afford to stay.

Is there a way to access this money even if your company doesn't allow it?
There has to be a way. I should be able to withdrawal at least the money I put in over the years.

It doesn't seem right that they can keep that from that money.
I can understand not giving me access to the portion they matched.

I understand the different penalties and taxes taken out.

How does a hardship withdrawal affect your tax refund?

Thanks.

[ebaines]

Have you considered taking out a loan against your 401(k)? Most plans allow it. Talk to your plan administrator and see if that's an option for you.

As for how a withdrawal affects your tax refund - any withdrawal you take prior to age 59-1/2 will trigger a 10% penalty plus federal and state income tax on the amount you withdraw. You're better off going the loan route if at all possible.

[midwestocean]

Thanks. We inquired out a loan, but the plan only allows a very small amount which won't really help anything. I'd rather take out more, start fresh and budget better so we can have more leftover & reinvest it.
The total penalty for us would be about 32%.
Does this affect the tax refund, is it considered income thus putting us in a higher tax bracket?
Or is it taken out when/if you withdrawal?

[ebaines]

The total penalty for us would be about 32%.
Does this affect the tax refund, is it considered income thus putting us in a higher tax bracket?
Or is it taken out when/if you withdrawal?

You can expect a flat 20% to be withheld from your payout. Next April you will have to include the 10% penalty plus any other taxes due when you file our Form 1040. Whether you will still get a refund or not is impossible for anyone here to predict. - it depends on too many factors. However, if this is a substantial withdrawal, you may very well indeed be pushed into a higher marginal tax bracket, and you should plan on writing the government a check in April.

[ScottGem]

First, since the prupose of a 401K plan is retirement income, a plan CAN block in service withdrawals as long as the rule is applied to all members. So the bottom line here, is if the plan prohibits in service withdrawals, then you can't withdraw. And it seems awfully foolish to quit a job just to get the money out. That's not going to make your financial situation any better, it will make it worse.

Yes a 401K withdrawal affects your tax liability. The amount of the withdrawal is added to your taxable income, this could bump you into a higher bracket. The 20% taken out from the distribution is a withholding. What you actually have to pay is determined when you file your taxes. So the amount you pay in taxes will increase. How that affects whether you get a refund or not, we can't tell.

But, that is a moot point if the plan doesn't permit withdrawals. I strongly suggest you look at other alternatives. Quitting your job would be stupidity.

[midwestocean]

ScottGem, "And it seems awfully foolish to quit a job just to get the money out. "
"Quitting your job would be stupidity."
I never said I would even consider that, it would be the least smart thing to do!
Please don't add insult to an innocent question about whether there is a loop hole in the plan.

ebaines,
If you pay taxes on the withdrawal, why would you have to pay again come tax time?

[ScottGem]

ScottGem, "And it seems awfully foolish to quit a job just to get the money out. "
"Quitting your job would be stupidity."
I never said I would even consider that, it would be the least smart thing to do!!
Please don't add insult to an innocent question about whether or not there is a loop hole in the plan.

And how was I supposed to take this:

I don't want to leave so close to the potential of a promotion, but can't afford to stay.

If that isn't considering leaving to get the money, I don't know what is. I wasn't insulting you, I was responding to something YOU posted.

You don't pay taxes on the withdrawal, you have taxes WITHHELD. Both ebaines and I referred to the 20% as wihholding. This is the same as the taxes withheld from your paycheck. What is withheld from your weekly paycheck is not the actual amount that you will owe. That isn't calculated until you complete your tax return. That's why you may get a refund, because what was withheld is more than you actually owe. But because the withholding of a 401K distribution is a set 20%, it could be less that what you will owe on the income it represents. So you won't actually know what your tax liability actually is until you complete your return. The amount of taxes you owe is then compared to the total withheld for taxes. If the withholding is greater you get a refund, if not, you have to pay.

[midwestocean]

After speaking with a financial rep assigned by our company's EAP, the company may allow a hardship withdrawal.
Does anyone know the criteria?
I've attempted to look on IRS.gov and found nothing.
He said that you have to be close to foreclosure (which we are no where near)
Or have missed several mortgage payments (we've never even been late)
I would think that a hardship withdrawal would be preventative so you do not come to this & hurt your credit.
But other criteria I have found include 'down payment for residence'
Foreclosure and a down payment are opposites of serious matters.
Our company (ranked amongst america's largest private companies) is projected a 60% hit and thus a 60% decrease in pay. We have exhausted other savings.

What are some criteria?
Thanks

[ScottGem]

This article defines the criteria:

Hardship Withdrawals from your 401K Plan

Qualifying for hardship just eliminates the 10% penalty, not the tax consequences.

[ebaines]

I found the following at: http://www.iapda.org/articles/2006_08_10_archive.html

The IRS code that governs 401k plans provides for hardship withdrawals only if:

(1) the withdrawal is 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 401k plan and
(5) you can't contribute to the 401k plan for six months following the withdrawal.

The following four items are considered by the IRS as acceptable reasons for a hardship withdrawal:

- Un-reimbursed medical expenses for you, your spouse, or dependents.
- Purchase of an employee's principal residence.
- Payment of 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.
- Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.

Hardship withdrawals are subject to income tax and, if your are not at least 59.5 years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.

[ebaines]

Qualifying for hardship just eliminates the 10% penalty, not the tax consequences.

Not true - qualifying for a hardship withdrawal means the IRS lets you take a withdrawal while still an active employee - it does not eliminate the 10% penalty.

[ScottGem]

Hmm I was sure there were instances where they waive the penalty, but I guess not. What a hardship withdrawal then means is that plans can decide NOT to offer in service withdrawals. Some plans do allow them. For those that don't allow them, they can use hardship as a way around the prohibition. But the financial consequences are unchanged.

[midwestocean]

Thanks.
Does anyone know what you need to show...
"Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence."

We probably don't qualify, although going forward we may not be able to pay our mortgage next month... I guess we have to go into default first?

That seems so wrong, but then again so is having to even consider withdrawing from the 401K.