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What’s a Hardship Withdrawal?

By JLP | August 23, 2010

According to this article, more people are taking hardship withdrawals from their 401(k) accounts.

What is a hardship withdrawal?

A hardship withdrawal is a withdrawal from a retirement plan (like a 401(k) or IRA) to meet a “hardship” need.

What qualifies as a hardship? From the IRS:

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee. (Source)

“Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution.”

Isn’t it a shame that they had to throw that in there?

How much can be withdrawn?

The IRS’s explanation is a tad confusing but if I’m understanding it correctly, you can’t take out more than your contributions. And, depending on the plan, you might be able to take out matching contributions. Read here for more details or, better yet, talk to your HR person.

A hardship withdrawal is different from a loan in a couple of ways:

• those who take a hardship withdrawal are generally not allowed to make contributions to their retirement plan for six months.

• the withdrawal is subject to income tax and may be subject to the early withdrawal penalty.

• hardship withdrawals are not paid back to the plan. This differs from a 401(k) loan.

That last point is important because it could make a significant difference in the 401(k) balance at retirement. I would think long and hard before I took a hardship withdrawal from a retirement plan.

I would be leery of pulling money out of my 401(k) to pay medical bills. I would also advise against a hardship withdrawal to buy a house. Instead, I would look at a 401(k) loan. If you can’t afford to pay it back, then you probably shouldn’t be buying the house. Unless it’s for your education, I definitely would not take a hardship withdrawal for college expenses. The other three reasons listed above are understandable but I would only go the hardship route if all other options are exhausted.

What about you? Are you considering a hardship withdrawal? Send me an email and tell me your situation. I might even be able to post it here on AFM (anonymously of course) so that AFM readers and I might give you some advice or at least be your sounding board before you make a decision.

Topics: Miscellaneous | 2 Comments »


2 Responses to “What’s a Hardship Withdrawal?”

  1. JC Says:
    August 23rd, 2010 at 11:09 am

    “Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution.”

    Isn’t it a shame that they had to throw that in there?

    Actually, the fact that the word “generally” in there makes me think it’s conceivable that it COULD qualify for a hardship withdrawal! Insane……

  2. JB Says:
    October 26th, 2010 at 11:17 pm

    My mother will be passing soon and has no retirement, or life insurance. She is still fighting but is getting weak. I am her caretaker and will be responsible for funeral and burial expenses as well as hospice care she is undergoing. How should I approach this withdrawal when the requests that they are asking refer to this situation and not my own.

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