Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

September 7, 2012
How do I pay taxes on a 401(k) hardship withdrawal?

Q: I had a hardship withdrawal from my 401(k) in 2012 to pay for my mortgage. I did not pre-pay any tax or penalty. I understand that when I file my 2012 tax return, I have to pay tax and penalty on the amount I withdrew. However, I can imagine that it is a rather hefty amount and I may not have enough money to pay it. What are my option(s)? -- Thank you, Elk Grove

A: If you cannot pay the entire balance due with your return when you file it, you have two options. Which option you choose may depend on your ability to make monthly payments.
The first option, assuming you can make monthly payments, is to request installment payment agreements with the IRS and FTB. IRS Form 9465 is used to request the federal installment payment arrangement. Use FTB Form 3567 to request a payment plan with the state.
If the federal balance due is under $25,000 and the monthly payment will allow the debt to be paid within 36 months, the IRS will automatically approve the request. Similarly, the state will generally approve requests if the debt is less than $25,000 and can be paid within 60 months. You will have to pay interest and late payment penalties, but you won't be subject to aggressive collection activities as long as you keep current with the monthly payments.
There are processing fees that must be paid with the forms requesting the payment plan. The federal fee is $105 if the monthly payments will be made by check, money order, or credit card; $52 if you pay through electronic funds transfer. The state fee is $34. See the instructions to the forms for more information. They can be obtained from the IRS and FTB's web sites or district offices. You can file them online through the tax agencies' web sites. See and
If you don't have enough income to make monthly payments and you don't have assets that can be borrowed against or sold to raise cash, you may want to consider the second option, making Offers In Compromise to the IRS and FTB to settle the debts. I recently covered the federal Offer In Compromise process in a post on this blog on August 23, 2012 under the title,"How do I work out a settlement with the IRS for back taxes?" The FTB has a similar Offer In Compromise process. Use FTB Form 4905 PIT to make the offer. See the FTB 4905 PIT Booklet for more information.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.

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