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Like loans, hardship withdrawals are allowed by law, but your employer is not required to provide for them in your plan. Again, most companies do, but some don't. The cost of administering such a program can be prohibitive for many small companies. Check with your Human Resources department if you're not sure if your plan allows hardship withdrawal. Like loans, your employer must adhere to some very strict and detailed guidelines.
The IRS code that governs 401k plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can't contribute to the 401k plan for six months following the withdrawal.
The following six items are considered by the IRS as acceptable reasons for a hardship withdrawal:
- Un-reimbursed medical expenses for you, your spouse, or dependents.
- Purchase of an employee's principal residence.
- Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
- Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
- For funeral expenses.
- Certain expenses for the repair of damage to the employee's principal residence.
Hardship withdrawals are subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.
For more background and information on 401k hardship withdrawals, check out these resources:
Hardship Withdrawals Give Access to Your 401k Savings, But at a Cost
Emergency Access to Your 401k: Hardship Withdrawals
Don't Tap Your 401k to Pay Off Debt
Do's and Don'ts of Hardship Distributions
IRS FAQs Regarding Hardship Distributions
Casualty Hardships: A Review
Remember, the information on this web page is provided as general guidance on the subject of 401(k) plan loans and is not provided as legal, tax or investment advice. Individual situations vary, so consult your tax, legal or financial advisor for more detailed information and advice.