BlogSelf-Directed Solo 401k Distribution for Unexpected Medical Bill
Posted about 3 months ago

Self-Directed Solo 401k Distribution for Unexpected Medical Bill

BACKGROUND & QUESTION

I need to take $12,000 out of my solo 401K for an unexpected medical bill. Will this be exempt from withholdings as my medical bills will be over 10% of my net income this year?

ANSWER:

The typical reason for taking a solo 401k distribution from a solo 401k plan on account of hardship is because the individual has not yet reached age 59 1/2 or does not have any eligible funds (funds that were rolled over to to the solo 401k plan from an IRA or a former employer plan) in the solo 401k plan that can be distributed unless a triggering event is met–such as, no longer being self-employed or being over age 59 1/2. See Reg. Section 1.401-1(b)(1)(i) and IRC Section 401(a)(20) and (36)

Federal Taxes Still Apply

A solo 401k may permit distributions on account of the solo 401k participant’s hardship, the upfront withholding of 20% of mandatory federal taxes at the time of the distribution still applies.

In addition to the solo 401k hardship distribution being subject to federal and possibly state taxes, a 10% early distribution penalty applies unless you were over age 59 1/2 or older at the time of the distribution. This 10% additional penalty tax is paid when you file your personal tax Form 1040 return.

Hardship-Immediate Financial Need

IRS regulation section 1.401(k)-1(d)(3) contains detailed rules on what is and is not considered a hardship.

The hardship solo 401k distribution an be made if the distribution both is made on account of an immediate and heavy financial need of the participant and is necessary to satisfy the financial need.

The solo 401k hardship distribution is limited to the amount necessary to satisfy that financial need.

Here are examples of hardship events for hardship solo 401k distribution purposes:

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