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Tax Talk & Blogs: Surviving the Pink Slip:
Tapping the 401k

By Brenda Schafer MSA, CPA, CFP, EA
The Tax Institute at H&R Block

Before You Touch Your 401(k), Just Know What You’re In For

I originally set out to write a tome to dissuade readers from taking money out of their retirement plans to pay bills in these tough economic times. Over the course of the last few weeks, though, I’ve heard more and more stories about hard-working people who have lost their jobs and who are struggling to make ends meet. I have to count my blessings every day that I have a well-paying job and am not in peril of losing it. (Thank you, God. Thank you, H&R Block.)

Of course it’s better to have an emergency fund to fall back on, but these days your financial needs may easily last longer than any nest egg you may have put aside. So, although your retirement should be a source of last resort, you may find it necessary to dip into it. Most of you know that many employer retirement plans allow a "hardship" distribution when the plan participant can show the amount is needed to satisfy a dire financial need. You all understand that these distributions are taxable. But what I find that most people aren’t prepared for is the fact that if you’re under age 59 ½, they are also subject to the 10% early withdrawal penalty (unless an exception applies). And no, financial hardship isn’t one of those exceptions. Worse news, your resident state may also tax the distribution and even subject it to an early withdrawal penalty of its own.

What I’m getting at here is that the total tax you’ll pay on a distribution from your employer plan can easily be 50% or more of the distribution. All I can ask is that you understand the tax consequences of a hardship withdrawal and are prepared for it at tax time. ---Maybe Congress will take to heart the gravity of the situation and pass a law to waive the tax and penalty on distributions that are taken out by unemployed individuals; or maybe even just the penalty. Hey, there’s a thought. Let’s write our Congressmen .. and women.

In the meantime, I wish all of my faithful readers good fortune in the days ahead.

 
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I inherited a 401 K from my deceased brother. I used the monies to pay for his funeral. Can I deduct the funeral expenses. There was no will or estate. I am 55 years old.
emurf , 14 Nov 2009 02:27:46 GMT
rhiis: Most 401K plans allow for a hardship distribution to you, your spouse or your dependents. The actual terms of what qualifies as a hardship distribution depends on each 401K plan and the rules that allow for the hardship distribution. You would need to check with the administrator of your 401K plan. They could tell you what the money should have been spent on to qualify as a hardship distribution, specific to your 401K. Generally -- however -- you might be able to avoid the penalty if you have spent the money from your retirement plan on the following items: Medical care expenses (including insurance payments) for you, your spouse or any of your dependents. Costs directly related to the purchase of your principal home College tuition payments paid on behalf of you, your spouse or a depenent. Money paid to prevent foreclosure or eviction from your principal home Funeral expenses paid in case of the death of your parent, your spouse. Some expenses that related to repairing damage to your principal home. Gerri W, H&R Block TaxPro
AshleyV , 19 Oct 2009 19:38:44 GMT
What happens if you have already tapped into you 401k in January and now due to unemployment we may need to again? Have been unemployed for over 1year, for husband his benifits ran out, no job in the outlook, and we tapped his, now we may need to tap both this time in order to pay bill, IE: lights, fuel, food, creditors, any way we can tap them w/out the penlty? How do you apply for hardship cases
rhiis , 8 Sep 2009 19:30:07 GMT
corkdork1- You could qualify for the FTHB credit, which is $8000 on your 2009 tax return. That would help a little. I would take all your information in to a local H & R Block tax office and see if there is something you can do. Without having all your information in front of me its hard to give you the best answer to your question. -AshleyV, H & R Block Taxpro
AshleyV , 30 Jun 2009 20:41:32 GMT
I recently bought my first home. I took a hardship withdrawal on my 401K. I taxed my withdrawal at 7%. Is something I can do offset the tax bill I will have in 2010? Thanks
corkdork1 , 22 Jun 2009 21:02:45 GMT
cphillips --- I haven't seen the newsletter you are referring to so it's hard to know exacly what it said. However, a taxpayer can deduct the expenses of using the home for business purposes if the portion of the home is exclusively used as the principal place of business. -Stephanie, H&R Block TaxPro
StephanieV , 20 May 2009 18:56:43 GMT
starene --- You would need to contact your local social security office to find out if you qualify for unemployment. -Stephanie, H&R Block TaxPro
StephanieV , 20 May 2009 18:46:33 GMT
malone123 - Can you please be more specific. What are you referring to when you ask how you can recover the money you are owed? -Stephanie, H&R Block TaxPro
StephanieV , 20 May 2009 18:45:30 GMT
farmville - If you do not qualify for the 65% Cobra discount you will not receive it. -Stephanie, H&R Block TaxPro
StephanieV , 20 May 2009 18:43:29 GMT
didn't realize it was 50% tax on early withdrawal - so high!
john , 15 May 2009 10:48:14 GMT
appreciate someone understanding that even though you know the issues with the penalties things are so desperate right now that you may need to access the money. It makes you sick to do it, but times are tight for sure!
jenniferjackson , 15 May 2009 10:43:46 GMT
Thanks for the info. I think I knew it but this straight forward explanation makes it really easy to get.
cookiemonster , 15 May 2009 10:33:41 GMT
Did anyone answer cphillips? I have the same question.
notafakename , 13 May 2009 21:57:38 GMT
I never knew that I might be eligible for unemployment; I was just stold to apply for SS Disability. It is it too late to apply for unemployment? I was released back in 2003.
starene , 8 May 2009 10:50:33 GMT
One year I made about $1230 working for H & R Block, seasonal. I did not qualify for unemployment because I did not make enough in the year 2008. How do I regain the money I am owed. I say this because in the same year my husband made $4000 more than I did and EDD would not give my husband unemployment benefits, neither. How do we avoid facing these same tribulations for the year 2009? I have not worked in the year 2009 yet, but I am enrolled at Kaplan University for my Bachelors Degree in Business. My husband was laid off last week, but with past unemployment credits he should qualify for the extention.
malone123 , 8 May 2009 07:04:42 GMT
For the pasts 15 years I worked at Circuit City, and can't get Cobra because the company is out of business. I tried getting health insurance, but all companies rejected me because of my health condition. I'm currently on medication for high blood pressure, and my Doctor gave me free 30 day supply of my medication. He realizes I losts my nest egg, which was invested in Circuit City's employee stock plan, but now the stock is worthless. I'm trying to get another job with health benefits, but I live in a state with high unemployment, and I would be lucky to get a job for $10 an hour. Do you have any suggestions for me getting an affordable health insurance?
4sfe038 , 8 May 2009 01:11:19 GMT
I don't understand: Do I have to pay the 65% discount on my tax return for 2009 I am presently utilizing Cobra at the 65% rate?????Individuals who receive the subsidized premiums but who are all or partly phased out of the benefit will have to repay the excess benefit as an additional tax reported on their tax return.
farmville , 7 May 2009 23:31:18 GMT
My comment is about the newsletter section on deducting expenses for a home office. You say the office must be a separate structure, not part of the house. I think that is not correct. Please clarify. ---C. Phillips
cphillips , 7 May 2009 22:12:01 GMT
Upload by: HRB Digits 14 Nov 2009 02:27:47 GMT
Tags: 401k,retirement,unemployment
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