nycgirl191 wrote:
ehpaul wrote:
First of all - Congratulations to those admitted to 2011 HKUST MBA. Question for American applicants - if any of you are planning to withdraw partially or entirely from your IRA account for education fund? According to the IRS, there will not be early withdrawal penalty as long as the school is an "IRS-approved institution". No doubt most American MBA are in this approved category. What about HKUST?
ehpaul, HKUST has a FAFSA code, so I *assume* it is an IRS-approved institution, but I am researching this as well and will keep you posted on what I find out!
Hey guys-
I've got an interest in this issue as well - here's what I've turned up so far on 401(k) hardship distributions:
Although the distributions are subject to the rules as defined by each individual plan, 401(k) hardship distributions are generally
not subject to the 10% penalty. Also the regs say "Payment of tuition, related educational fees, and room and board expenses,
for up to the next 12 months of post-secondary education for the employee,
or the employee’s spouse, children, or dependents." There is no reference to
qualified education expenses as would be necessary to avoid a 10% penalty on distributions from an IRA. So, unlike an IRA, I don't think the school needs to be FAFSA approved for the 401(k) hardship distribution to be penalty-free. For IRA considerations on whether HKUST is FAFSA approved, they are not on an updated list as of 2/1/11 and are in the process of being re-certified - let's hope it goes through before school starts.
For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.
Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee's spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Using a distribution prior to liquidating all other feasible assets will result in the distribution being taxed and subject to the 10% penalty. Any cash in savings/checking also must be applied to the hardship expense before determining the amount of the qualifying distribution.
A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if: (1) the employee has obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer; and (2) the employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.
A hardship distribution may not exceed the amount of the employee's need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.
RECORDING THE DISTRIBUTION: Your 401k administrator may record the request for an exception but is not the entity that grants it. The IRS does that when you file your taxes. You will receive a 1099-R for the distribution. The distribution must be added to income on Line 15 of Form 1040, whether you get the exception or not. The exception only applies to the penalty, not the income taxes. You must further file Form 5329 to record the early distribution and establish your hardship need. You will need the following documentation:
• Tuition statement or invoice.
• Room and board statement or invoice.
• Receipts, statements or invoices for other educational related expenses.
• A copy or confirmation of your most recent beneficiary designation made under the Plan, if the financial hardship is with respect to a Participant’s primary beneficiary.
03 Mar 2011, 07:59
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