401K Hardship Withdrawal

401K Hardship Withdrawal

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A 401k Hardship Withdrawal Sometimes Creates Hardships

Attorneys say, “When in doubt, consult the statutes.”  Of course, that’s lawyer-speak for “read the book.”  Here’s what the book says about 401k hardship withdrawal:

 

For a distribution from a 401k to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.  The need of the employee includes the need of the employee’s spouse or dependent.

 

Some of the expressions in the statute carry extra weight in real life. 

 

“Immediate and heavy,” for example, usually means you will have to prove your need to your employer.  With the understanding that he will protect the confidentiality of all you disclose, your employer is entitled to documentary evidence of your need to take a 401k hardship withdrawal.  Specifically, you will have to prove the need’s severity, your lack of other resources for meeting the need, and you either have taken loans against your 401k or the plan’s loan limits don’t cover your need. 

 

Similarly, “the amount must be necessary to satisfy the financial need.”  Specifying the amount of your 401k hardship withdrawal, you must match your request to the total of the bills you cannot pay.  Normally, employers show greatest concern when your request for a 401k hardship withdrawal exceeds the total of your obligations; ordinary common sense dictates that your employer has every right to know the reason for requesting the excess.  But shortfalls matter, too.  If you suffer a “heavy” need, why haven’t you petitioned for a 401k hardship withdrawal to the full extent of your obligations?

 

Your employer also will certify you meet the plan’s conditions for a 401k hardship withdrawal; you cannot request your 401k hardship withdrawal for any reason at all.  You legitimately may request a 401k hardship withdrawal if you intend to use the money for: (1) purchase of your first home, or (2) the cost of higher education for a family member, or (3) to prevent eviction from or foreclosure on your home, or (4) tax deductible medical expenses you cannot pay by any other means.

 

A 401k hardship withdrawal is not the extreme form of a loan; you cannot repay a 401k hardship withdrawal.  You forfeit both the interest and dividends on those funds, and you forfeit the lifetime tax advantage those funds would offer.  You will pay the standard 10% penalty on your 401k hardship withdrawal, and the money will be subject to regular income taxes.  Depending on your tax bracket and other circumstances a $ 10,000 401k hardship withdrawal may net you only about $ 7000.

 

As with all early distributions from your retirement account, a 401k hardship withdrawal represents a last resortâ€"the option you begin to consider only after you have exhausted all your other remedies, including the ones you had told yourself, “I never would…”  If you genuinely have no other choice, then you should request a 401k hardship withdrawal, keeping in mind that the tools for relieving your hardship will bring hardships of their own.

Related 401K Hardship Withdrawal Articles

Question by amy h: can you do a 401k hardship with-drawl when you have 401k loans? i have 17000.00 in my 401k account. i owe 17000.00 in 401k loans. could i do a hardship with-drawl and still pay my loans Best answer for can you do a 401k hardship with-drawl when you have 401k loans?:

Answer by joseph.hussein.foust
No, because you'd still owe interest...

Answer by doreen k
You cannot make a withdrawal because all the money in your 401k is collateral for the loans. Unfortunately, there is nothing available for you to withdraw. In a way, you have already taken it in the form of a loan. Once you have paid back some of it, you can take that portion if you qualify for a hardship withdrawal.

Answer by digdowndeepnseattle
Yes you can. The law states that you need 50% of your loan balance in your 401k when you take the loans - not the whole time you have your loans. So long as the need is for one of the acceptable hardship reasons and the 17k that you have in your account is money that you contributed and not money that employer contributed on your behalf then you can take it out. You are limted to only your contribution amounts; no earnings and no employer contributions (vested or not).

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