To qualify for a hardship withdrawal, you typically need to show that you have an immediate and heavy financial need, and that you’ve exhausted other resources. Approved hardships include medical expenses, funeral expenses, college tuition, and preventing foreclosure or eviction. The amount you can withdraw is generally limited to the amount necessary to relieve the hardship, and you may have to pay taxes and penalties on the withdrawal amount. To request a hardship withdrawal, you’ll need to submit a written request to your plan administrator, explaining your financial hardship and providing supporting documentation. The plan administrator will review your request and make a decision on whether to approve your withdrawal.
IRS Eligibility Requirements
To qualify for a hardship withdrawal from your 401(k) plan, you must meet certain eligibility requirements set by the Internal Revenue Service (IRS).
- Immediate and Heavy Financial Need: You must have an immediate and heavy financial need that cannot be reasonably met through other means.
- IRS-Approved Expenses: The withdrawal must be used to cover certain IRS-approved expenses, such as:
| Expense Category | Withdrawal Allowed |
|---|---|
| Medical expenses (including expenses for dependents) | Yes |
| Tuition, related educational fees, and room and board expenses for the next 12 months for postsecondary education (for you, your spouse, or your dependents) | Yes |
| Purchase of a primary residence (principal residence for yourself or your family) | Yes |
| Prevent eviction or foreclosure from your principal residence | Yes |
| Burial or funeral expenses for your deceased spouse, dependents, or yourself | Yes |
| Repairs to your primary residence due to a disaster | Yes |
- Proof of Need: You must provide documentation to your plan administrator to demonstrate your financial need and the expenses you incurred.
- Reasonable Amount: The amount you withdraw must be reasonable and necessary to meet your financial need.
Plan Eligibility
Not all 401(k) plans allow hardship withdrawals. To be eligible, the plan must meet the following requirements:
- The plan must be in writing.
- The plan must be established and maintained by an employer.
- The plan must be primarily for the benefit of employees.
- The plan must provide for the distribution of benefits in accordance with the requirements of the Employee Retirement Income Security Act (ERISA).
In addition, the participant must meet the following requirements:
- The participant must have an immediate and heavy financial need.
- The participant must have exhausted all other reasonable sources of funds.
- The participant must have notified the plan administrator of the hardship withdrawal request.
Conditions for Hardship Withdrawal
The following are conditions that must be met in order to qualify for a hardship withdrawal:
- The participant must have an immediate and heavy financial need.
- The participant must have exhausted all other reasonable sources of funds.
- The participant must have notified the plan administrator of the hardship withdrawal request.
The following are examples of immediate and heavy financial needs:
- Medical expenses
- Tuition expenses
- Funeral expenses
- Purchase of a principal residence
- Prevention of eviction or foreclosure
The following are examples of reasonable sources of funds that must be exhausted before a hardship withdrawal can be taken:
- Personal savings
- Borrowing from family or friends
- Taking out a loan
- Selling assets
The plan administrator must review the participant’s request and determine whether the participant meets the requirements for a hardship withdrawal. If the plan administrator approves the request, the participant will be able to withdraw a portion of their 401(k) funds.
Tax Consequences of Hardship Withdrawal
Hardship withdrawals are subject to income tax and, if the participant is under age 59½, an additional 10% early withdrawal penalty.
| Withdrawal Amount | Income Tax Withheld | Early Withdrawal Penalty |
| $10,000 | $2,000 | $1,000 |
| $20,000 | $4,000 | $2,000 |
| $50,000 | $10,000 | $5,000 |
The income tax withheld from a hardship withdrawal can be used to offset other taxes owed. The early withdrawal penalty cannot be used to offset other taxes owed.
Withdrawal Consequences
Withdrawing money from your 401(k) account before you’re 59½ can have several negative consequences, including:
- Income tax. You’ll have to pay income tax on the amount you withdraw at your current tax rate, which could be higher than your tax rate when you retire.
- 10% early withdrawal penalty. You’ll also have to pay a 10% penalty on the amount you withdraw, unless you qualify for an exception.
- Reduced retirement savings. The money you withdraw from your 401(k) account will no longer be available to grow tax-free, which could reduce your retirement savings.
Exceptions to the Early Withdrawal Penalty
There are a few exceptions to the 10% early withdrawal penalty, including:
- Birth or adoption of a child.
- Disability.
- Medical expenses.
- Certain educational expenses.
- First-time home purchase.
Taking a Loan From Your 401(k) Account
If you need money from your 401(k) account, you may be able to take a loan instead of withdrawing money. With a loan, you borrow money from your account and pay it back with interest. Loans are not subject to the early withdrawal penalty, but you will have to pay interest on the amount you borrow.
Hardship Withdrawal Table
| Hardship | Documentation Required |
|---|---|
| Medical expenses | Medical bills, receipts, or a letter from a doctor |
| Funeral expenses | Funeral expenses, receipt, or a letter from a funeral home |
| Tuition, fees, and related educational expenses for the next 12 months | Tuition bill, fee statement, or a letter from a school |
| Purchase of a principal residence for the first time | Contract or settlement statement for the purchase of a home |
| To prevent eviction or foreclosure from your principal residence | Eviction or foreclosure notice |
| To pay reasonable expenses related to repairing damage to your principal residence | Insurance claim, repair bill, or a letter from a contractor |
| To purchase food, clothing, or other basic necessities for household members | Receipts or bills for food, clothing, or other basic necessities |
| To pay for transportation for you or your household members to and from work | Receipts or bills for transportation |
| To pay for childcare expenses to allow you to work | Receipts or bills for childcare expenses |
Hardship Withdrawal From 401k: A Guide
A hardship withdrawal from a 401k plan is a withdrawal from your account that is made due to an immediate and heavy financial need. This type of withdrawal is only available if you meet specific criteria set by the IRS, and it is subject to taxes and penalties.
Criteria for Hardship Withdrawal
- Medical expenses for you, your spouse, or your dependents that exceed 7.5% of your AGI
- Costs for purchasing a principal residence
- Tuition and related educational expenses for the next 12 months
- Funeral expenses
- Certain expenses related to the repair or replacement of your main home
Taxes and Penalties
Hardship withdrawals are subject to ordinary income tax and a 10% early withdrawal penalty if you are under age 59 1/2.
Alternative Options for Financial Relief
- 401k loan: This allows you to borrow money from your 401k plan, which must be repaid with interest.
- Early distribution: You may be able to take an early distribution from your 401k if you are over age 59 1/2.
- Financial assistance programs: There are many government and non-profit programs that provide financial assistance to those in need.
- Sell assets: Consider selling assets, such as a car or jewelry, to cover your expenses.
Table: Comparison of Options
| Option | Taxes/Penalties | Repayment |
|---|---|---|
| Hardship withdrawal | Income tax + 10% penalty | Not required |
| 401k loan | No taxes/penalties | Required, with interest |
| Early distribution | Income tax + 10% penalty | Not required |
Alright folks, that’s about all you need to know to withdraw funds from your 401k in case of a hardship. I really do hope you never have to dip into your retirement this way, but if you do, at least you’ll know how to do it. Thanks for reading, and be sure to visit again later for more helpful tips and advice.