My sister was working full time. She lived with my mother and the two of them co owned a home. My mother died unexpectedly and left my sister to make all the payments. she went back to work ( insurance castastorpe claims adjuster) and all the bills she was left with she became ill , due to stress, and has been diagnosed with ulcerative colites. She was hospitalized for some time. While on disability she was informed that her position was being terminated. she was offered a severance package but told either she could stay on, Without pay and disability ran out, and keep insurance or leave and take the severance package. She took the severance package and did not recieve anything for 2 to 3 months and was behind on bills. She borrowed money from family and friends to cover essential bills but fell further and further behind. she recieved her 401k money and used most of it to cover her behind bills. Is this enough to help her avoid the 10% penality and how should she file.
Answer:
Unfortunately, withdrawals due to financial hardship before age 59-1/2 generally incur the additional 10% tax, unless the person is totally and permanently disabled. If she's been declared totally and permanently disabled, not just that she was temporarily disabled and lost her job during that time, she can probably get out of the penalty.
Download publication 575 from irs.gov for more info.
You dont get penalized for drawing from your 401k for financial hardship. Have your account fix your year end filings to reflect that
If your sister is going to be 55 (at least) at any point in the year of termination, the withdrawal will not be subject to the 10% penalty. Also if her out-of-pocket medical expenses exceed 7.5% of her Adjusted Gross Income for the year, the amount of 7.5% will not attract a penalty either (this applies whether she itemizes or not). She will have to file form 5329 to make the necessary claims.
In any case, she will still have to pay tax on the income but 20% should already have been withheld anyway.
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