If you're younger than 59½ and suffering financial hardship, you may be able to withdraw funds from your retirement accounts without incurring the usual 10% penalty.
While most exceptions to the 10% penalty tax apply to both IRAs and qualified retirement plans like 401(k)s, some exceptions are specific to qualified plans. These include withdrawals after separating from service at age 55 or older and distributions to an alternate payee under a qualified domestic relations order.
Starting this year, if your employer plan allows, you can withdraw $1,000 from your 401(k) per year for emergency expenses, which the Secure 2.0 Act defines as "unforeseeable or immediate financial needs relating to personal or family emergency expenses." You won't face an early withdrawal penalty, but you will have to ...
However, there are exceptions to this early distribution penalty. The penalty doesn't usually apply to distributions from your employer plan or IRA if any of these are true: You're totally and permanently disabled. Your beneficiary receives the distribution from your retirement plan after your death.
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 IRS specifies you can withdraw funds for yourself, your spouse, or beneficiary for the following: Expenses to prevent foreclosure or eviction. Repair costs for damage to your principal residence (in the event of losses from floods, fires, or earthquakes)
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.
If you are withdrawing money because of an emergency, you might qualify for a fee waiver. You can usually qualify for a waiver in cases of death, disability, or court-determined incompetence, for example. 7 Banks are permitted to waive penalties in these situations, but they're not required to do so by law.
Traditional IRA distributions
Penalties: If you wait until you're at least age 59 1/2, you won't pay the 10% early withdrawal penalty on your IRA withdrawals. Taxes: If you claimed a deduction for your traditional IRA contributions, the money you withdraw is taxable.
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.
In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Thus, a hardship distribution permanently reduces the employee's account balance under the plan.
Hardship distribution for a reason not allowed by the plan
For example, if the plan states hardship distributions can only be made to pay tuition, then the plan can't permit a hardship distribution for any other reason, such as a home purchase.
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.
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.
Unfortunately, there's usually a 10% penalty—on top of the taxes you owe—when you withdraw money early. This is where the rule of 55 comes in. If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty.
Specifically, as of 2024, you can withdraw up to $1,000 from your qualified plan (e.g., 401(k), 403(b), 457(b)) or IRA (including SEP, Simple IRA) once each calendar year without penalty. You will still have to pay ordinary income taxes on the withdrawal.
You must pay income tax on any previously untaxed money you receive as a hardship distribution. You may also have to pay an additional 10% tax, unless you're age 59½ or older or qualify for another exception. You may not be able to contribute to your account for six months after you receive the hardship distribution.
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.