The 401(k) hardship withdrawal process
Note that there's always a chance your request will be denied.
Your employer plays a role in administering 401(k) plans and may need to approve withdrawals in certain situations, such as in-service withdrawals or hardship distributions.
To be eligible for a hardship withdrawal, you must have an immediate and heavy financial need that cannot be fulfilled by any other reasonably available assets. This includes other liquid investments, savings, and other distributions you are eligible to take from your 401(k) plan.
Many plans approve hardship withdrawals through a self-certification process where you provide a written statement confirming: Your distribution meets the plan requirements and is for one of the approved “immediate and heavy financial needs.”
You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship. You will want to keep documentation or bills proving the hardship, however.
The consequences of false hardship withdrawal can range from fines and penalties to tax implications or even jail time. Additionally, lying to an employer can severely hinder your career growth or result in job loss. In other words, if you don't qualify, seek an alternative solution.
You may need to supply supporting documentation of your hardship, including legal documents, invoices, and bills. Although the IRS does not approve hardship withdrawals from 401(k)s, you may still be audited. So, ensure all your ducks are in a row if you are permitted a 401(k) hardship withdrawal.
Acceptable Documentation
Lost Employment. • Unemployment Compensation Statement. (Note: this satisfies the proof of income requirement as well.) • Termination/Furlough letter from Employer. • Pay stub from previous employer with.
Key takeaways
A 401(k) loan may be a better option than a traditional hardship withdrawal, if it's available. In most cases, loans are an option only for active employees. If you opt for a 401(k) loan or withdrawal, take steps to keep your retirement savings on track so you don't set yourself back.
The IRS sets penalties for early withdrawals of money in a 401(k) account. Depending on the situation, these penalties may be a small price to pay in the face of an emergency. A company can refuse to give you your 401(k) if it goes against their summary plan description.
The IRS may agree that you have a financial hardship (economic hardship) if you can show that you cannot pay or can barely pay your basic living expenses. For the IRS to determine you are in a hardship situation, the IRS will use its collection financial standards to determine allowable basic living expenses.
Only one withdrawal from your super can be made in any 12-month period on the grounds of financial hardship. You should note that reducing your super account balance may impact any insurance cover you have with Vanguard Super. You can find out more about your insurance at www. vanguard.
3. 401(k) loan. 401(k) loans are generally considered to be a better option than a hardship withdrawal if given the choice, since you're essentially borrowing from yourself. Not all plans allow 401(k) loans — although it is a fairly common feature — so be sure to check with your employer.
An economic hardship occurs when we have determined the levy prevents you from meeting basic, reasonable living expenses. In order for the IRS to determine if a levy is causing hardship, the IRS will usually need you to provide financial information so be prepared to provide it when you call.
You may not get approved: Those nearing retirement may be considered “higher risk” and thus denied a 401(k) loan because payments will no longer automatically come out of their paychecks.
The decision maker only considers you to be in hardship if: You cannot meet your immediate and most basic essential needs or those of a child you are responsible for. For example: accommodation, heating, food and hygiene.
Letters from medical professionals, as evidence of physical and/or emotional conditions that will lead to extreme hardship to the U.S. relative. Copies of tax returns and/or pay statements as evidence of your household income. Copies of statements showing any debts that need to be settled in the United States.
To make a 401(k) hardship withdrawal, you will need to contact your employer and plan administrator and request the withdrawal. The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction.
If your business has 100 or more eligible participants at the beginning of the plan year, you must undergo a 401(k) audit through a third party. The “keyword” in this situation is “eligible,” so even if some of your employees choose not to participate, they still count toward the audit requirement.
But if you are facing a serious financial hardship and need your refund immediately, the IRS can consider not following its usual procedures of taking the refund. Instead, it may release and expedite part or all the refund to help with your hardship.
The approval can be denied by the plan sponsor if they feel you have not demonstrated a financial hardship in line with the plan. It's in their discretion. You can always seek a remedy through legal action, but if you are denied, then you are denied, until a ruling is made through legal action.
Hardship Withdrawals from Roth 401(K) Contributions
“Qualified” distributions from Roth accounts are fully excludable from gross income. To be qualified, the distribution must be made after: The participant has reached age 59½, become disabled, or died, and. The Roth account has been maintained for at least five years.
If you want to pay off debt, you might be asking yourself, “Can I cash out my 401(k)?” The quick answer is that you can. But whether you should cash out may be the more important question. Before going down that road, you should first review the 401(k) loan rules—and understand the potential financial impact.