Retirement Plan Early Withdrawal Penalty

[Sam Slade]

Client has to withdraw funds from a 401k plan to pay balance of mortgage when house is sold for less than mortgage owed. Home was sold in order for clients (husband and wife) to take new jobs in another state. Is there any way to get out of the 10% early withdrawal penalty?

[Roberts]

Client has to withdraw funds from a 401k plan to pay balance of mortgage when house is sold for less than mortgage owed. Home was sold in order for clients (husband and wife) to take new jobs in another state. Is there any way to get out of the 10% early withdrawal penalty?

How old are they? Do they have medical expenses? Were they unemployed when they took out the distribution?

A distribution to pay off a mortgage generally doesn't qualify but they may have special circumstances that allow them to avoid at least SOME of the penalty.

[Roland Slugg]

Reference

You may read about the exceptions to which Roberts refers in his reply above in Code §72(t). Keep in mind that one or two of the exceptions only apply in the case of early distributions from an IRA, not a 401(k) as in your client's case.

[Sam Slade]

Retirement Plan Early Withdrawal Penalty

They were both under age 591/2, no medical expenses, and were not unemployed.

[OtisMozzetti]

hardship treatment by 401(k) administrators

I recently encountered some taxpayers that were allowed to make a hardship withdrawal from a 401(k) at age 58. The purpose of the withdrawal was to pay for someone's funeral. No exception to the early distribution penalty applied. They ignored the income until the arrival of a CP2000 letter, which by the way made no mention of the early distribution penalty.

[joanmcq]

The penalty won't be mentioned. It will just be added onto the tax calculation on the last page.