401K Distribution and foreclosure question

[Tax Prep by Deb]

I have a client whose home was foreclosed upon. Just prior to being evicted they cashed in their 401K plan and paid the mortgage to save the house.

They had a 1099R showing the distribution coded 1. I also read some papers that was sent them explaining that in very limited situations the penalty could be abated. One on the reasons listed was severe financial distress. Has anyone heard about this? Is it true I can get the penalty abated for them and if so how? If shown on 5329 what code do I use?

Any help will be greatly appreciated!

Deb!

[Pacun]

I have a client whose home was foreclosed upon. Just prior to being evicted they cashed in their 401K plan and paid the mortgage to save the house.

They had a 1099R showing the distribution coded 1. I also read some papers that was sent them explaining that in very limited situations the penalty could be abated. One on the reasons listed was severe financial distress. Has anyone heard about this? Is it true I can get the penalty abated for them and if so how? If shown on 5329 what code do I use?

Any help will be greatly appreciated!

Deb!

The exception for the penalty is to purchase your first home. In this case, they have to pay the penalty.

[LindaB]

This might be what you're looking for, I didn't read it all:

http://www.irs.gov/retirement/article/0,,id=162416,00.html

[Tax Prep by Deb]

This might be what you're looking for, I didn't read it all:

http://www.irs.gov/retirement/article/0,,id=162416,00.html

Thanks for the link!

It was what I was looking for and pretty much confirmed my gut feeling, however it's always nice to have something printed out so that when you tell the client they owe lots of money, they can see for themselves why!

Again thanks!

Deb!