Question

Paul Rogers is a participant in his employer's Section 401(k) retirement plan, having made both salary reductions as well as receiving employer matching contributions to his account over the past year. In the current year, Paul incurs a family medical emergency, causing him to take a hardship distribution from the plan. After taking this distribution, Paul comes into some found money and, instead, rolls over the amount of the hardship distribution into his traditional IRA. What is the taxable consequence, if any, of this distribution and rollover transaction? A)So long as it is treated as a loan under plan provisions, the distribution will be treated as tax free. B)The distribution is taxable in full as ordinary income since it is not eligible for rollover treatment. C)The portion of the distribution representing Paul's salary reduction contributions is tax free. D)The distribution is taxable but is eligible for a tax credit since it is made from a qualified plan.

Answer 1

A hardship distribution from a 401(k) is taxable as ordinary income and not eligible for a rollover into a traditional IRA, thus it is immediately taxable and not subject to rollover benefits.

The correct option is B.

Step-by-step explanation:

The taxable consequence of taking a hardship distribution from a Section 401(k) retirement plan and attempting to roll it over into a traditional IRA is crucial to understand. Such distributions are subject to immediate taxation as ordinary income and, importantly, are not eligible for rollover treatment.

Thus, option B (The distribution is taxable in full as ordinary income since it is not eligible for rollover treatment) is correct. Additionally, the tax-deferred nature of a traditional IRA means that while contributions and growth within the account are not taxed upfront, distributions are taxed as ordinary income upon withdrawal.

The correct option is B.