If you aren't, I'm curious how you justified the 10% penalty PLUS the tax consequences. And by "yanked" do you mean liquidated?
It is, of course no business of mine whatsoever and i realize you aren't advocating the same thing for the OP (You aren't, are you?) I just find that sort of thing to be a very curious decision if it was made merely because you were concerned about the market.
As far as "Economic Hardship" is concerned, this is what the IRS says, from Publication 575 (
http://www.irs.gov/publications/p575/ar02.html#d0e4359 )
General exceptions. The tax does not apply to distributions that are:
*
Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service). See Substantially equal periodic payments, later,
*
Made because you are totally and permanently disabled, or
*
Made on or after the death of the plan participant or contract holder.
Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are:
*
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees),
*
From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order,
*
From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year,
*
From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election,
*
From an employee stock ownership plan for dividends on employer securities held by the plan,
*
From a qualified retirement plan due to an IRS levy of the plan, or
*
From elective deferral accounts under 401(k) or 403(b) plans, or similar arrangements, that are qualified reservist distributions.
And the following from the IRS Retirement Plans FAQ article (
http://www.irs.gov/retirement/article/0,,id=162416,00.html )
1. Under what circumstances can a participant get a hardship distribution from a retirement plan?
A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Thus, 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.
It is important to clarify this point with the plan provider
If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
(Reg. §1.401(k)-1(d)(3)(i))
The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.
If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an "unforeseeable emergency."
(Reg. § 1.457-6(c)(2))2. What is the IRS definition of hardship for a 401(k) plan?
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. The need of the employee includes the need of the employee's spouse or dependent. (Reg. §1.401(k)-1(d)(3)(i))
Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee's non-spouse, non-dependent beneficiary.
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.
(Reg. §1.401(k)-1(d)(3)(iii))
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. Thus, for example, a vacation home owned by the employee and the employee's spouse generally is considered a resource of the employee, while property held for the employee's child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. §1.401(k)-1(d)(3)(iv)(B))
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. (Reg. §1.401(k)-1(d)(3)(iv)(E))
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.
(Reg. §1.401(k)-1(d)(3)(iv)(A))
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