What is a 401k Hardship Withdrawal Penalty?
A hardship withdrawal penalty is imposed on early distributions from 401(k) plans for financial hardships. A financial hardship, for the purposes of an early withdrawal, refers to a financial need that no other source can satisfy, such as rent or mortgage payments to avoid becoming homeless.
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Effects
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The amount of the hardship withdrawal is subject to income taxes as well as a 10 percent tax penalty. For example, if you take a $8,000 hardship withdrawal, you would have to pay an $800 penalty and include an extra $8,000 in income taxes.
Function
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To report a hardship withdrawal penalty, you must use IRS Form 5329 to calculate the penalty and report the penalty on your Form 1040 tax return.
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Size
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The amount that you can take for a hardship withdrawal is limited to the amount of the hardship plus the taxes and penalties you will owe on the withdrawal.
Significance
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The 401(k) hardship withdrawal penalty is imposed to discourage people from raiding their retirement savings and abusing the tax advantages that 401(k) plans offer for purposes besides retirement savings.
Considerations
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You may want to consider taking a loan from your 401(k) plan if your plan administrator allows loans. Though the money has to be repaid, you do not incur a tax penalty or income taxes as long as you repay the loan.
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