A hardship withdrawal allows you to take money out of your 401(k) account before you reach age 59½. To qualify, you must have an immediate and heavy financial need that you can’t meet through other means. Hardship withdrawals can be used for expenses like medical bills, college tuition, or to prevent foreclosure on your home. You must take the money out in one lump sum. You’ll pay income tax on the amount you withdraw, and you may also have to pay a 10% penalty. This penalty is waived if you use the money for certain expenses, like medical care for yourself, your spouse, or your dependents.
Unforeseeable Financial Emergencies
Unforeseeable financial emergencies are unexpected events that can cause a significant financial hardship and require immediate access to funds. Examples of unforeseen financial emergencies that may qualify for a hardship withdrawal from a 401(k) plan include:
- Medical expenses for the employee, spouse, or dependents that are not covered by insurance
- Expenses for the purchase of a principal residence (including mortgage payments, closing costs, and down payments)
- Post-secondary educational expenses for the employee, spouse, or dependents
- Costs related to preventing foreclosure or eviction from a primary residence
- Funeral expenses for a family member
It’s important to note that each 401(k) plan may have its own specific criteria for determining what constitutes a hardship withdrawal. Participants should carefully review their plan documents or consult with their plan administrator to understand the specific requirements.
| Type of Expense | Examples | Required Documentation |
|---|---|---|
| Medical Expenses | Hospital bills, doctor’s fees, prescription costs | Medical bills, insurance statements |
| Purchase of Primary Residence | Mortgage payments, closing costs, down payment | Mortgage contract, closing statement, proof of ownership |
| Post-Secondary Educational Expenses | Tuition, fees, books, housing | School invoices, transcripts |
| Preventing Foreclosure/Eviction | Mortgage payments, rent payments, property taxes | Mortgage/rental statements, eviction notice |
| Funeral Expenses | Funeral home costs, burial expenses, cemetery fees | Funeral home invoice, death certificate |
Hardship Withdrawals from 401(k) Plans: Medical Expenses and Funeral Costs
A hardship withdrawal is a withdrawal of funds from a 401(k) plan before retirement due to an immediate and heavy financial need. To qualify for a hardship withdrawal, the withdrawal must be used to pay for:
- Medical expenses
- Funeral costs
- Education costs
- Down payment on a principal residence or mortgage payments on a principal residence
- Certain expenses related to the repair of a principal residence
- Payments necessary to prevent eviction from or foreclosure on a principal residence
- Funeral expenses of a spouse, dependent, or beneficiary
- Costs directly related to adoption
- Purchase of a primary residence within a certain time frame following a disaster
- Certain expenses of an individual with a disability
- Payments required to be made under a qualified domestic relations order (QDRO)
- Expenses incurred during unemployment
Medical Expenses
Medical expenses that qualify for a hardship withdrawal include those for:
- Doctor visits
- Hospital stays
- Prescription drugs
- Dental care
- Vision care
- Nursing home care
- Long-term care
Funeral Costs
Funeral costs that qualify for a hardship withdrawal include those for:
- Funeral services
- Burial expenses
- Cremation expenses
- Transportation of the deceased
- Headstone or marker
| Expense | Qualification |
|---|---|
| Medical expenses | Expenses must be for the participant, spouse, dependents, or beneficiaries of the participant. |
| Funeral costs | Expenses must be for the funeral of the participant, spouse, dependents, or beneficiaries of the participant. |
Loss of Income or Impending Foreclosure
To qualify for a hardship withdrawal from a 401(k) plan due to loss of income or impending foreclosure, you must meet strict requirements set by the IRS. These requirements include:
- You must have an immediate and heavy financial need.
- You must have no other reasonable means to meet your financial obligations.
- You must have exhausted all other resources, such as savings, loans, and credit cards.
Loss of Income
You may qualify for a hardship withdrawal if you have lost your job or experienced a significant reduction in income. To prove your loss of income, you will need to provide documentation, such as:
- A termination letter from your employer
- A layoff notice
- A reduction in your work hours or pay
- A self-employment income statement showing a significant decrease in earnings
The amount you can withdraw is limited to the amount needed to cover your immediate financial obligations. These obligations may include:
- Medical expenses
- Funeral expenses
- Education expenses
- Housing expenses (rent or mortgage payments)
- Utilities (electricity, gas, water)
Impending Foreclosure
You may also qualify for a hardship withdrawal if you are facing impending foreclosure on your home. To prove your impending foreclosure, you will need to provide documentation, such as:
- A foreclosure notice from your lender
- A notice of intent to foreclose
- A statement from your mortgage servicer showing that you are behind on your payments
The amount you can withdraw is limited to the amount needed to bring your mortgage payments current. This amount may include:
- Overdue mortgage payments
- Late fees
- Escrow shortages
It is important to note that hardship withdrawals are taxable. The amount you withdraw will be included in your taxable income for the year in which you receive the withdrawal. You may also be subject to a 10% early withdrawal penalty if you are under the age of 59½.
Unforeseen Housing or Rental Expenses
If you are facing unexpected housing or rental expenses due to:
- Loss of income due to job loss, reduction in work hours, or illness
- Unforeseen medical expenses
- Natural disasters such as hurricanes, floods, or earthquakes
- Unexpected home repairs or renovations
You may qualify for a hardship withdrawal from your 401(k).
Thanks for sticking with me to the end, withdrawal warrior! I hope this deep dive into the realm of hardship withdrawals has helped shed some light on the subject. Remember, the ins and outs of 401k hardship withdrawals can be a bit of a labyrinth, so don’t hesitate to reach out to a financial advisor or tax professional if you need further guidance. Keep an eye out for my future articles—I’ll be dishing out more financial know-how to help you navigate the ever-changing money maze. Until next time, keep on hustling and saving smarter!