If you have no better alternatives and decide to proceed, you'll need to get in touch with your company's human resources department. They'll give you some paperwork to fill out and then ask you to provide some documentation. Once that's done, you should eventually receive a check with the requested funds.
You may need to share proof of the hardship event and show that you don't have insurance or other assets and can't qualify for a loan before you receive the hardship withdrawal. Your employer may also want to verify that you can't cover the hardship by stopping your 401(k) contributions.
When you take a distribution from your 401(k), your retirement plan will send you a Form 1099-R. This tax form shows how much you withdrew overall and the 20% in federal taxes withheld from the distribution.
401(k) Hardship Withdrawal Rules
If your account provider permits you to take out funds, you'll have to show that you don't have other available funds to cover the expenses. A qualifying financial need doesn't have to be unexpected.
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72.
The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction.
The IRS dictates you can withdraw funds from your 401(k) account without penalty only after you reach age 59½, become permanently disabled, or are otherwise unable to work.
You can set any amount allowed by the plan or IRS guidelines and request how to receive your funds. Processing a distribution will depend on the 401(k) administrator's process. However, most disbursements will process within one or two weeks.
How long does it take to cash out a 401(k) after leaving a job? Depending on who administers your 401(k) account, it can take between three and 10 business days to receive a check after cashing out your 401(k).
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
Because the taxable amount is on the 1099-R, you can't just leave your cashed-out 401(k) proceeds off your tax return. The IRS will know and you will trigger an audit or other IRS scrutiny if you don't include it. However, there are a couple things you can do.
An early withdrawal from a 401(k) plan typically counts as taxable income. You'll also have to pay a 10% penalty on the amount withdrawn if you're under the age of 59½.
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
Lying to get a 401(k) hardship withdrawal can have serious consequences, such as legal repercussions in the form of fraud, financial penalties, and tax implications. If you're caught lying about legibility for a hardship withdrawal, you may face additional fees, fines, and even imprisonment.
The main way to avoid a penalty is to wait until you are 59.5-years-old before withdrawing from your 401(k) account. There are a few reasons you can withdraw money from a 401(k) prior to 59.5 without incurring a penalty. These include disability, death, and Equal Payments (IRS code 72t).
Transferring Your 401(k) to Your Bank Account
That's typically an option when you stop working, but be aware that moving money to your checking or savings account may be considered a taxable distribution. As a result, you could owe income taxes, additional penalty taxes, and other complications could arise.
If there is less than $1,000 in your account, your former employer will cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer has 60 days to roll it into another retirement account, such as an IRA, that they help you set up.
The Plan Administrator under ERISA, named in the Plan documents and listed in your SPD will need to review and approve your hardship withdrawal, including any supporting documentation they require to substantiate the withdrawal. In most smaller plans, the Plan Administrator is often your Employer.
Death of a close family member. Domestic violence. Evicted in the past six months or is facing eviction or foreclosure. Experienced homelessness. Medical expenses that resulted in substantial debt.
States That Don't Tax Retirement Income
Those eight – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – don't tax wages, salaries, dividends, interest or any sort of income.
Key Takeaways
If you withdraw funds early from a traditional 401(k), you will be charged a 10% penalty. You will also need to pay income tax on the amount you withdraw, since pretax dollars were used to fund the account. In short, if you withdraw retirement funds early, the money will be treated as income.
Yes, the IRS does know if you withdraw from your 401K. When you withdraw funds from your 401K, your plan administrator will report the distribution to the IRS using Form 1099-R. This information is also reported to you on Form 5498, which you will receive at the end of the tax year.
The Bottom Line. Withdrawals from 401(k)s are considered income and are generally subject to income tax because contributions and growth were tax-deferred, rather than tax-free.
Early withdrawal from retirement plans
Generally, early distributions from a retirement account are income and you must report it on your return. If you take funds out of a retirement account before age 59 1/2, you may be subject to additional tax.