A 401k hardship withdrawal is a withdrawal of funds from a 401k retirement plan before reaching age 59½ when facing financial hardship. This withdrawal allows plan participants to access funds for certain IRS-approved expenses, such as medical or funeral expenses, purchase of a primary residence, or preventing eviction or foreclosure. To qualify for a hardship withdrawal, the participant must show that they lack other reasonable sources of funds to meet the expense, and the withdrawal is necessary to satisfy the financial hardship. The withdrawn funds are subject to income taxes and may also be subject to a 10% early withdrawal penalty unless the participant is over age 55. It’s important to consider the potential impact on retirement savings and consult with a financial advisor before making a hardship withdrawal.
401(k) Plan Qualification
To qualify for a 401(k) plan, an employer must meet certain requirements:
- The employer must have a minimum of 100 employees (including part-time and seasonal employees) on each day of at least 50% of the business days during the prior calendar year.
- The employer must be organized as a corporation, partnership, or sole proprietorship.
- The employer must maintain a principal place of business in the United States.
- The employer must be engaged in business for at least one year.
If an employer meets these requirements, the employer can establish a 401(k) plan. Employees who are at least 21 years old and have worked for the employer for at least one year are eligible to participate in the plan.
| Qualification | Requirement |
|---|---|
| Number of employees | At least 100 employees |
| Business organization | Corporation, partnership, or sole proprietorship |
| Principal place of business | United States |
| Years in business | At least one year |
| Employee eligibility | At least 21 years old and worked for the employer for at least one year |
What is a 401k Hardship Withdrawal?
A 401k hardship withdrawal is a way to access your 401k funds before retirement if you have a financial hardship. To qualify, you must meet certain requirements and provide documentation to your plan administrator.
The amount you can withdraw is limited to the amount necessary to cover your hardship. You will have to pay income tax on the amount you withdraw, and you may also have to pay a 10% early withdrawal penalty if you are under age 59½.
Eligible Financial Hardships
- Medical expenses (for you, your spouse, or your dependents)
- Unpaid funeral expenses (for you, your spouse, or your dependents)
- College tuition and related fees (for you, your spouse, or your dependents)
- Purchase of a primary residence (for you or your spouse)
- To prevent eviction or foreclosure from your primary residence
- To repair damage to your primary residence
In addition to these general categories, your plan may have its own specific list of eligible financial hardships.
Documentation Required
To request a hardship withdrawal, you must submit documentation to your plan administrator that proves your financial hardship. The documentation may include:
- Medical bills
- Funeral expenses
- Tuition bills
- Mortgage statements
- Eviction or foreclosure notices
Your plan administrator will review your documentation and determine if you qualify for a hardship withdrawal.
Withdrawal Penalties and Taxes
Withdrawing money from a 401k account before age 59½ typically incurs a 10% early withdrawal penalty from the IRS, in addition to income taxes on the withdrawn amount. However, hardship withdrawals may be an exception to this rule if you meet specific criteria.
To qualify for a hardship withdrawal, you must demonstrate that you have an immediate and heavy financial need due to an unforeseen emergency. Acceptable reasons include:
- Medical expenses (not covered by insurance)
- Secondary education or college expenses
- Funeral expenses
- Buying a primary residence
- Preventing eviction or foreclosure
If you qualify for a hardship withdrawal, you can withdraw up to the amount necessary to cover the emergency expense. However, you must pay income taxes on the withdrawn amount, and there is still a 10% penalty if you are under age 59½. To avoid the penalty, you can repay the withdrawal within 60 days.
The table below summarizes the penalties and taxes for 401k hardship withdrawals:
Age Penalty Income Taxes Under 59½ 10% Yes 59½ or older None Yes ,⢈ BRARY”,”>