The change would work like this: Under current rules, anyone making what’s known as a “hardship” early withdrawal of funds from their 401(k) must pay the IRSa 10% penalty on top of ordinary income taxes. A bill introduced Oct. 5 would waive the penalty if the purpose of the distribution is to make loan payments to avoid loss of a primary home to foreclosure.Co-written by Sen. Johnny Isakson and Rep. Tom Graves, both Republicans from Georgia, the bill would allow owners to pull out up to $50,000. The money could be used in a lump sum to pay down the delinquent mortgage balance or to fill shortfalls caused by reductions of household income. It could also be used as part of loan modification agreements with lenders designed to avert a foreclosure. No matter how the money is used to resolve the mortgage delinquency, it would need to be spent within 120 days of receipt and could not exceed 50% of the funds in the retirement account.
It must be understood that this bill only exempts the 10% penalty the taxpayer would be required to pay income tax on the withdrawal.
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