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401(k) Tip |
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If you make a hardship withdrawl you may be subject to:
- Income tax due on earnings
- 10% penalty from early withdrawal that doesn't qualify for exception
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Anytime you withdraw pretax money from your 401(k), you owe income tax. A hardship withdrawal is no exception. And if you’re younger than 59½ you may also owe the 10% early withdrawal penalty unless you are using the money to pay uncovered medical expenses that exceed 7.5% of your adjusted gross income.
For example, if you're in the 25% federal income tax bracket, you'll owe $10,000 on a $40,000 hardship withdrawal. You may be able to add the tax you'll owe to the amount you're eligible to withdraw—if that much is available to you—in order to cover your need and your federal, state, and local income taxes. If you face a 10% early withdrawal penalty, which in this example would be $4,000, you may need to take even more. And, of course, the more you withdraw, the greater your tax bill.
You may be able to postpone paying any tax that's due by timing your withdrawal to hit at the beginning of the new tax year rather than at the end of the old one. For example, if you take the money in January rather than December, you have an additional year to pay the tax. Even if tax planning is the last thing on your mind as you struggle to make ends meet, you could buy yourself a little relief.
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