Taking Hardship Withdrawals |
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You may be able to withdraw from your 401(k) account to meet the needs of a real financial emergency. The IRS cites a number of circumstances which may qualify as a hardship withdrawal, including:
- Out-of-pocket medical expenses
- Down payment or repairs on a primary home
- College tuition and related educational expenses
- Threat of mortgage foreclosure or eviction
- Burial and funeral expenses
While the IRS sets certain guidelines, it leaves it to your employer to determine the specific criteria of a hardship withdrawal. For instance, one plan may consider a medical expense to be a hardship, but not payment of college tuition. Even if your plan allows for a hardship withdrawal, you should probably think of it as a last resort. Companies often prohibit contributions for at least six months after taking the withdrawal, and hardship distributions permanently reduce your account balance. In addition, you will have to pay taxes on the amount you withdraw, plus a 10 percent penalty if you are under age 59½ .
If you do apply, your plan will probably require you:
- To prove that your situation qualifies as a hardship, usually by providing itemized bills or other supporting documents
- To show you can’t get the money you need any other way
You may be expected to withdraw any after-tax dollars you’ve contributed to your 401(k) account, borrow the maximum permitted from the plan, and apply for commercial loans as part of the qualification process.
Finally, your plan administrator may follow up after the withdrawal to verify that you used the money as you indicated you would in your application. And you’ll usually have to wait six months before you can again contribute to your plan.
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