For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse's, your dependents' or your primary plan beneficiary's: medical expenses, funeral expenses, or. tuition and related educational expenses.
It used to be the case that employees had to provide their employers with proof of their financial hardships before they could take hardship withdrawals. The IRS no longer requires employers to have that documentation but does advise that employees keep it in case they are audited.
The IRS is clear as to what counts as a hardship: The event must pose “an immediate and heavy financial need of the employee.” The agency lays out some guidelines that qualify: Certain medical expenses. Costs relating to the purchase of a principal residence. Tuition and related educational expenses.
The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction.
Lying to get a 401(k) hardship withdrawal can have serious consequences, such as legal repercussions in the form of fraud, financial penalties, and tax implications. If you're caught lying about legibility for a hardship withdrawal, you may face additional fees, fines, and even imprisonment.
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.
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.
There are a few situations where it makes sense to tap your 401(k) to get rid of personal debt. All of them fall into the category of hardship withdrawals, which are designated for “immediate and heavy” financial needs. Examples include: A down payment for buying a permanent residence.
Although a financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee, certain expenses do not qualify. For example, For example, expenses for the purchase of a boat or television would generally not qualify for a hardship distribution.
The Plan Administrator under ERISA, named in the Plan documents and listed in your SPD will need to review and approve your hardship withdrawal, including any supporting documentation they require to substantiate the withdrawal. In most smaller plans, the Plan Administrator is often your Employer.
Under the new rules related to the SECURE 2.0 Act of 2022, employees may state they had emergency expenses that merit a hardship withdrawal. Beginning in 2024, they can take up to $1,000 per year for emergency expenses without incurring the usual 10% early withdrawal penalty.
With a hardship withdrawal, you can take money out of your 401k without penalty if you're facing an immediate and heavy financial need, such as medical bills or a job loss.
'Last resort' 401(k) hardship withdrawals rise
Bank of America's recent participant pulse report showed that the number of 401(k) plan participants taking hardship withdrawals was up 13% from the second quarter and 27% compared with the first quarter of the year — with the average withdrawal amount just over $5,000.
Disadvantages of a Hardship Withdrawal
The amount that is withdrawn cannot be repaid back into the plan. Hardship withdrawals are subject to income tax and will be reported on the individual's taxable income for the year.
Paying off debt with money from your 401(k) plan can make sense in some cases. But you'll also be reducing your retirement savings, so it's worth weighing the pros and cons, as well as considering some alternatives that may be preferable.
“But it wouldn't be recommended to take it out to satisfy non-essential expenses, like credit cards or other loans,” Nitzsche says. Consider also the opportunity cost of withdrawing your retirement savings during a market decline.
A hardship withdrawal is when you take money early from your 401(k) account in response to an immediate, urgent financial need. While early withdrawals (those made before you reach the age of 59.5) normally come with a 10% penalty, this penalty does not apply to hardship withdrawals.
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.
Hardship withdrawals may get even easier to tap in 2023 with the new Secure 2.0 retirement regulations signed into law by President Biden in December. The new rules allow employees to self-certify that they meet the hardship criteria and will only take out the amount they need to cover their financial emergency.
Submit supporting documentation.
Provide supporting documents along with your hardship letter to help prove the legitimacy of your claim. Depending on your situation, you might submit documents such as an unemployment notice, medical bills, military orders or a divorce decree.
Please remember: it takes 10-15 business days to process a hardship withdrawal. In addition to the processing time, please allow 1-3 business days to receive the funds electronically and 7-10 days for checks sent via mail.
If you are still employed with the company, the plan can deny you in-service withdrawals. Each plan has its own rules and regulations, and some are more strict than others on in-service withdrawals. Some do not allow them at all. Some allow loans from 401(k)s while others do not.
You may need to share proof of the hardship event and show that you don't have insurance or other assets and can't qualify for a loan before you receive the hardship withdrawal. Your employer may also want to verify that you can't cover the hardship by stopping your 401(k) contributions.