We all know that withdrawing money early from your 401k isn’t always easy, not to mention that it is usually not a good idea! The IRS allows tax advantages for saving in a qualified retirement account so that you’re incentivized to save for your future. But what happens when you really need the money? Unless you meet a ‘qualified event’ you might not be able to take a distribution from your 401k at all. Those qualified events are generally the following: You’ve reached age 59 ½ You’ve become disabled Termination of employment Death There’s one more qualified event that the IRS calls a ‘hardship distribution.’ If you meet the qualifications, you may have access to your retirement funds early through the 401k hardship withdrawal provision. It’s important to note that just because the IRS allows for such distributions, that doesn’t mean that your employer’s 401k plan has to provide 401k hardship distributions. Each employer plan can determine whether or not they will allow these types of distributions, so check with your HR office first. If they do allow hardship distributions, you’ll need to meet certain qualifications. Who Qualifies for a Hardship Distribution? Don’t be surprised if your human resources department has lengthy paperwork for you to complete on a hardship distribution. The IRS is very strict on who qualifies, so your HR department may have to ask you some personal questions about medical expenses, reasons for using the distribution, and even other sources that you can draw from first. It’s not because they’re being nosey. The IRS requires them to do this so that it can be determined whether you have to pay a 10% penalty or not. Normally, early distributions from a retirement plan (before age 59 ½) will be considered as taxable income and will have a 10% penalty due at your tax time. For a hardship distribution, the distribution will most likely be considered as taxable income but the penalty may be waived if you meet the following: From IRS Publication 17: You may not have to pay the 10% additional tax if you are in one of the following situations. You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income. The distributions are not more than the cost of your medical insurance. You are disabled. You are the beneficiary of a deceased IRA owner. You are receiving distributions in the form of an annuity. The distributions are not more than your qualified higher education expenses. You use the distributions to buy, build, or rebuild a first home. The distribution is due to an IRS levy of the qualified plan. The distribution is a qualified reservist distribution. 3 Things You Should Know Before You Take a Hardship Distribution 1. Qualifying for a hardship distribution doesn’t meant that you’ll have free reign to withdraw as much as you want from your 401k. You must document the amount that you need and the distribution cannot exceed that documented amount. 2. You cannot make a contribution to your 401k plan for six months after making a hardship withdrawal. While it does seem harsh, think of it as a time for you to build up adequate savings in an emergency fund . After all, your 401k is not an emergency fund so it shouldn’t be treated like one. 3. You cannot repay the hardship once you take it as a distribution. Once you take a 401k hardship distribution, you cannot replace it with one large contribution in the future. You must still follow the 401k contribution limits for additional contributions. Just because a hardship distribution is available to you doesn’t mean that you should use it. If you’re in a dire situation and need to use this provision as a last resort, be sure to check with your financial planner or accountant for council. What other options would you suggest for someone who is thinking about withdrawing from their 401k to pay for hardship expenses? 401k Egg image from Shutterstock Related Articles: What are Required Minimum Distributions or RMDs? What is a Health Savings Account (HSA)? When Can You Withdraw From Your Traditional IRA? Roth IRA 101 Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook .
What Are 401k Hardship Distributions?