As quite a few of you must be knowing, the 401k or 401(k) is a retirement savings plan. This is basically for the financial security of an individual (post retirement) who is employed. It is primarily funded through pre tax payroll deductions. Sometimes, what happens is that an individual can get into a financial emergency and there is no option other than the 401k. In that case that person goes for a 401k hardship withdrawal. Now, all the dealings related to this, akin to Roth IRA plan are governed by the IRS. Rules for 401k Hardship Withdrawal. A number of aspects are involved in the withdrawals from 401k. The conditions wherein you can apply for early withdrawal from 401k is the most important part of such a withdrawal. These conditions are – Purchase of principal residence. College expenses of the employee’s spouse, dependents or the employee himself. Now even if these conditions make a 401k withdrawal inevitable, there are some more criteria which have to be met. Instance, the applicant or the employee can go for the withdrawal only if no other source of finance is left. Must have first received all non-taxable distributions or loans you are eligible for and available to you under 401k. Moreover for six months after your withdrawal date, you cannot contribute to the account. Further, you are not allowed to withdraw more than the amount you are going to need. All these rules and criteria are laid down by the IRS. However, all the 401k plans do not offer such hardship withdrawals, so you need to check whether the plan you have allows you to do so. In some plans, with elective coverage, hardship withdrawals are permitted though within very stringent rules. You also would like to know about when will the penalty on the withdrawal be applicable and when it wouldn’t be. Penalty for 401k Hardship Withdrawal. The mantra of penalty is simple. If the person withdrawing money is 59.5 years of age at the time of distribution, he will need to pay a 10% early withdrawal penalty on the income tax return during the year end. Reporting an IRS hardship withdrawal, an individual has to use an IRS form -5239 for calculation of the penalty and then mention it on the form 1040 tax return. Primarily this penalty on 401k withdrawal is imposed so that people do not consume their retirement savings and fritter away the tax advantages 401k plan has to offer. There is however, an option wherein you can have a penalty free withdrawal. It can be made under section 72(t) of the Internal Revenue Code. Under this, you will not need to pay a withdrawal penalty, though the applicable income taxes prevail. There are a few cases too, where there can be no penalty, for instance, if the person is laid off or quits in the year when he will turn 55 or even after. If the person sustains permanent disability.Federal government helps students pursue higher education by providing a number of loans under the Federal Student Aid Program. The loans, that are sanctioned under the Federal Student Aid Program, can be obtained directly from the Federal Govt, or one may be required to obtain the loan from institutions participating in the FFEL (Federal Family Education Loans) program. Federal Stafford Loans and Federal Perkins Loans are administered by the govt. Under the Direct and FFEL programs. Repaying student loans, that are sanctioned under the Federal Student Aid Program, usually begins 6 to 9 months after a person graduates or drops out of school. The rate of interest on student loans is generally reasonable, more so, for Perkins and subsidized Stafford loans. Defaulting on the loan can backfire since the govt. Has devised a number of ways of ensuring that defaulters make good on their promise to pay. Wage garnishment, wherein the government takes away or ‘garnishes’ 15 % of a student’s disposable income as penalty, is one of the ways of recovering defaulted loans. The Debt Collection Improvement Act of 1996 (DCIA) authorizes Federal agencies to garnish the disposable income of an individual, without a court order, in order to collect delinquent non-tax debt that is owed to the Govt. Provided the individual is not a Federal employee. Garnishments continue until the ED’s Administrative Wage Garnishment system sends notification regarding cancellation. In case the employee quits the job, the former employer is expected to notify the ED, in writing or by phone within 10 business days, so that garnishments can be resumed by the new employer in accordance with the wage garnishment laws. One may seek legal counsel for further clarification regarding rules and exemptions of wage garnishment.Bankruptcy is the nuclear weapon of the financial world. This is the last resort or you can say the last tool to clear your debt. Before you file for bankruptcy, you should see if you could repair your credit to improve your credit score and the credit history. If you are badly in debt, it would be wise to meet a debt counselor for debt counseling. There are many credit agencies that would be willing to help you repay your debts by formulating a realistic repayment plan. If you are willing to adhere to the repayment plan come what may, you can surely clear off all your debts without filing for a bankruptcy. Prior to filing for a bankruptcy, make an attempt to settle your outstanding debts through debt consolidation. You should meet a reputed law firm that is well-versed in bankruptcy rules prior to filing for bankruptcy. You must realize that when you file for bankruptcy your entire credit history gets affected badly. This blemish remains on your credit report for the next ten years. Are you wondering whether you would be eligible for a home loan, personal loan or a new credit card? Bankruptcy is defined as a legal proceeding that is carried out in the bankruptcy court for the consumers and businesses to eliminate their debts to get a fresh financial start. The federal court handles all the cases of bankruptcy under the federal law. Chapter 7 and Chapter 13 are the two laws that are followed when an individual files for bankruptcy. Under the Chapter 7 of the bankruptcy law, if you own a property, the state can lawfully liquidate the property to pay off the debts. If the bankruptcy is filed under Chapter 13, you can keep all your property but you have the responsibility of repaying the debts in monthly installments within a period of three to five years. After bankruptcy. Life has to go on even after you have filed for bankruptcy. Filing for bankruptcy is not the end of the world and life is not going to come to a standstill. Even then, the rate of interest on the loans would be high. Life after bankruptcy is not so difficult, if you learn from your earlier mistakes. You can curb your spending and have a monthly budget planned out. If possible you can take up a weekend job along with your regular job. Make an extra effort to improve your credit score and continue doing the same until you are in the bracket of “Good Credit Score”. Home Loans and Bankruptcy. Obtaining home loans after bankruptcy can be a bit difficult because moneylenders or the banks are not willing to take the risk of having a bankrupt person as their customer. However, if you are ready to make the necessary rectification to your credit score by paying off the utility bills and the credit card bills in time, there is a chance of you getting a home mortgage loan. Take these tips into consideration. After bankruptcy, ensure that all your payments are made on time so you do not have any delinquent credit report. When a bank understands that you are paying your bills on time, it would make them feel more confident and it is more likely you would be eligible for a home loan at a favorable rate of interest. Purchase a prepaid credit card. Use it only for buying groceries and to pay for gas. Ensure to clear off the entire credited amount at the end of each month. This will help to establish a pattern of good credit in your credit report and the improvement reflects in the credit score. Meet a reputed debt counselor who can forward you to an experienced loan officer who specializes in subprime loans (A loan that is offered at a higher rate of interest. This loan is granted to people who do not qualify for prime rate loans). The loan officer would be in a position to advise you on home loans after reviewing your credit and job history, bankruptcy information and financial status. It is advisable to repair your bad credit to boost your credit score to increase before approaching for a home loan after bankruptcy. Personal Loans and Bankruptcy. When you take a drastic measure such as filing for bankruptcy to take off financial worries for the time being, it becomes a bit difficult to get any type of loans including personal loans. However, as mentioned earlier, although bankruptcy will leave your credit history in a mess it is not the end of the world.
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