A hardship withdrawal isn't a loan and doesn't require you to pay back the amount you withdrew from your account. You'll pay income taxes when making a hardship withdrawal and potentially the 10% early withdrawal fee if you withdraw before age 59½.
The amount of the hardship distribution will permanently reduce the amount you'll have in the plan at retirement. You must pay income tax on any previously untaxed money you receive as a hardship distribution.
Unless it's a forgivable loan or grant, you'll still need to pay it back. Some types of hardship loans come with higher interest rates. You may not qualify if you don't meet credit requirements.
Since Jan. 1, 2024, however, a new IRS rule allows retirement plan owners to withdraw up to $1,000 for unspecified personal or family emergency expenses, penalty-free, if their plan allows.
IRS doesn't audit individuals for 401(k) hardship withdrawals, AS LONG AS the employer sponsor of the plan and it's administrator (your employer and Fidelity) have approved it.
In some cases, you might be able to withdraw funds from a 401(k) to pay off debt without incurring extra fees. This is true if you qualify as having an immediate and heavy financial need, and meet IRS criteria. In those circumstances, you could take a hardship withdrawal.
Important: Hardship Payments of UC are loans that you have to pay back. You can qualify for a Hardship Payment of UC if: You or your partner are over 18 and have been sanctioned, and. You or your partner are expected to take part in work preparation or a work search, and.
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.
You may be taken to court
On that note, you can be sued for not paying back a payday loan, even if the loan amount is small.
What Proof Do You Need for a Hardship Withdrawal? You must provide adequate documentation as proof of your hardship withdrawal. 2 Depending on the circumstance, this can include invoices from a funeral home or university, insurance or hospital bills, bank statements, and escrow payments.
The consequences of false hardship withdrawal can range from fines and penalties to tax implications or even jail time.
The 401(k) hardship withdrawal process
If your employer doesn't deem your hardship as immediate or necessary, your request can also be turned down, O'Shea says. The entire process may take a few weeks, she adds.
401(k) hardship withdrawal cons
Current-year income tax liability at your marginal rate. Lost opportunity for years, if not decades, of tax-free compounding because you can't repay the money.
The act itself of signing up for a hardship plan has no effect on your credit. However, once you enroll, your credit scores could be indirectly affected because of the way the program works. First, your credit card issuer may put a note on your credit reports regarding your participation in its hardship plan.
There are no definite limits on the number of hardship withdrawals an employee can take in a year, but they'll be limited to whether they'll be approved for one and whether their 401(k) has enough money to cover the withdrawal. Also, some 401(k) plans may have even stricter guidelines than the IRS.
A hardship distribution is a withdrawal from a participant's elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower's account.
Although the IRS does not approve hardship withdrawals from 401(k)s, you may still be audited.
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.
Using the loan to pay off credit card debt may not meet the hardship criteria set by some plan administrators, as hardship withdrawals are generally restricted to specific circumstances defined by the IRS, including: Medical expenses. Costs related to purchasing a primary residence. Tuition and educational fees.
If conditions in the assignment locations are significantly more difficult than at home, a location allowance (hardship) payment will be made. The payment is determined as percent of salary and can vary from 0 to 30% in 5% increments.
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.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
You will not need to submit any documentation with your application to prove that you meet all of the qualifications to take a hardship withdrawal. As part of the application, you will certify that you meet all of the requirements to receive a hardship withdrawal.