401-K

[Christian]

A client may have to withdraw money from his account to pay some medical expenses.The

expenses will likely exceed ten percent of his AGI. Does the medical exception then allow all the money withdrawn to pay medical expenses avoid the ten percent penalty or only the amount above the ten percent threshold?

[kcjenkins]

A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Does your client's plan allow them?

A hardship distribution may not exceed the amount of the employee's need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution. (Reg. §1.401(k)-1(d)(3)(iv)(A))

The exception is code 05 Qualified retirement plan distributions up to the amount you paid for unreimbursed medical expenses during the year minus 10% (or 7.5% if you or your spouse are age 65 or older) of your adjusted gross income for the year.

[Jack from Ohio]

Agree with KC. Only the amount above the threshold is eligible for abatement of the penalty.

Taking money from any retirement plan is the most expensive source of funds. I am constantly advising my clients to make that a choice of last resort and NEVER for paying off other debt or to buy "stuff."

[Lynn EA USTCP in Louisiana]

Presuming the client has no other resources, Could the client ask for a LOAN from the plan instead of a distribution?

Lynn

[mrichman333]

Presuming the client has no other resources, Could the client ask for a LOAN from the plan instead of a distribution?

Lynn

I agree this would be better way to do it.

[Christian]

That is what I too suggested. Take a loan and repay it.

[BulldogTom]

That is what I too suggested. Take a loan and repay it.

Remind the client of the consequences of losing his job and the loan becoming an early distribution if that happens. Client has health issues and it is entirely possible that they will not be able to perform their job duties as a result and lose their job. It then is a double whammy of losing the job and getting hit with additional taxes at a time of high stress and poor health. Not good. Make sure they understand what the consequences are before they go down that road.

Tom

Hollister, CA

[kcjenkins]

Well, actually, Tom, we do not know if it's the client's health issue or his family member. Might be his spouse is the one with the medical bills, for example. But I do agree that taking the funds from the 401K should be a last resort, because it usually ends up costing more than even using a credit card! Plus you can not put it back, which at least the 'loan' option does allow.