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wiltony

Clarification On Early Withdrawals And Penalties

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Okay, so I've been reading up on this for quite a while, and it's still not completely clear:

 

With regard to a 403(b) plan, hardship withdrawals, and penalties:

 

  • Can anyone, at anytime, for any reason, withdraw their money from their account as long as they pay the 10% penalty (on top of the taxes)? In some places, I've read that they can indeed do this, but it doesn't make sense, because:
    • If so, what is the point of the hardship withdrawal provisions that are NOT exempt from the penalty, such as buying a home and education expenses? Why go through the "hardship withdrawal" headache if the outcome is exactly the same as if you performed an unsubstantiated "early withdrawal"?
    • If so, do I as a plan administrator have to somehow sign off on this unsubstantiated early withdrawal? Or can they simply go to the provider and say "give me my money," pay the penalty, and be done with it?

    [*]As a related question, why do 457 plans even have a hardship withdrawal provision if there is no early withdrawal penalty?

     

 

I guess if the answer to the first question is "no they cannot," then these rules make more sense. In that case, some hardship withdrawals allow for early distributions with a penalty, some without the penalty, and if no criteria are met, participants' money is completely locked up, right?

 

Please correct my understanding, this isn't making sense!

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Here's what threw me off, from http://www.wisestockbuyer.com/2012/06/can-i-get-money-out-of-my-401k-without-penalties/

 

"I’ll start by saying that you can withdraw money from your 401k at any time. It’s your money, after all; you have the right to pull your funds or even take out loans against them (more on that later). When you do, though, you not only have to pay taxes on your withdrawals; you also have to pay penalties."

 

Is this guy just wrong? Or could the 401(k) and 403(b) rules differ in this situation?

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The guy is wrong. With either 403b or 457b, you cannot withdraw your money "at any time" without meeting one of the hardship rules. He is right about about taxes AND a penality AFTER you qualify for one of the hardship rules.

With respect to the 457b, you have to be terminated from service to access your money and you can do this at any age. However, the 403b has a 59.5 age at which point you can withdrawal your money or roll it over to a roll over IRA without penality without terminating service. But you have to pay ordinary income taxes on all tax deferred funds at distribution. At 70.5 you must make distributions of all tax deferred funds.

 

If would help if you shared what your specific problem is.

Steve

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You answered my question and confirmed my suspicion that he was wrong, thank you so much for responding.

 

I didn't really have a specific problem, I guess, other than that I've had, in the past, someone come in and say "I don't qualify for any hardship provisions or meet other withdrawal criteria, but I just want MY money; I'll pay any penalties, etc." and I turned them away. I didn't feel confident about doing so after reading that post I linked to above. I do now, however.

 

I guess if I want to go into splitting hairs mode, I just want to clarify -- someone can take a hardship withdrawal WITH a penalty for unreimbursed medical expenses, but are EXEMPT from the penalty if those medical expenses exceed 7.5% of their AGI, right?

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If everybody could contribute and distribute at anytime, the tax auditing would be a nightmare for both the individual and the IRS. Also, I am a long term investor and I don't want people coming and going as they wish because they are "free." That short term trading does affect my long term investments too. Tax deferred plans are for long term savings and investment growth, a little regulation and restrictions serves everybody better--its for retirement! If people want to come and go as they please, do that with after tax money. If you want to be "free" to get YOUR MONEY, stay the hell away from 403b, 457b, 401k so that the rest of us can save and invest long term.

 

Someone else will have to answer your question.

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Joel, yes. My question is more complex than what the pub addresses. I shouldn't have brought it up here. Like I said, it's "splitting hairs." It's hypothetical, and not likely to be an issue I'll have to deal with anyway.

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