Help for 401k plan sponsors, retirement professionals, small business, employee and 401(k) rules


Frequently Asked Questions

Glossary of Retirement Terms

Emergency Access to Your 401k: Hardship Withdrawals

    

It can be pretty satisfying to get your 401k statement in the mail and see the good-sized balance that you've built. After contributing for several years, it's becoming easier to imagine all of the things that you'll be able to do with that money when you retire.

Then the doctor bill comes, or the tuition bill, or a late notice from your mortgage company. Suddenly, the pie-in-the-sky picture of retirement seems meaningless in the face of your current problems. So, can you access that 401k money to cover these sorts of hardships?

Yes, if your plan allows it.

To get at the money, however, you'll have to weave your way through a veritable obstacle course of regulations. You'll need to prove that you really need the money right now, says Jim Stone, a Chartered Financial Consultant (ChFC) and an instructor at the College for Financial Planning. "The financial hardship provision allows withdrawals only for immediate, pressing need," said Stone.

Reasons that people apply for hardship withdrawals vary from the whimsical, such as a trip to the Caribbean (which won't be approved), to the agonizing, such as paying for a child's leukemia treatment (which probably will). But, there are only four IRS-approved reasons for making a hardship withdrawal: college tuition for yourself or a dependent, provided it's due within the next 12 months; a down payment on a primary residence; unreimbursed medical expenses for you or your dependents; or to prevent foreclosure or eviction from your home.

It should be noted that, if your plan permits, you can take a loan from your 401k. And, while you can avoid penalties and taxes with loans (with a hardship withdrawal you can't), they must be paid back.

Forty-eight percent of the people who have taken a hardship withdrawal have done so to buy a home, according to a study conducted by the Investment Company Institute (ICI) in the spring of 2000. Other reasons cited were medical emergency (28 percent), bills or daily expenses (21 percent), and education (7 percent).

If you are exploring the idea of using the hardship withdrawal provision, make sure that you aren't making the decision lightly. Financial planners consistently stress that your 401k account does not work very well as a savings account or emergency fund -- the money is hard to get, the process is time consuming, and the damage you can do to your retirement savings account can take many years to repair.

The Approval Process

Before you begin: You will be in for a lot of paperwork if you decide to take a hardship withdrawal. Before beginning the process, you might consider discussing your financial situation and options with a financial planner.

The legally permissible reasons for taking a hardship withdrawal are very limited. And, your plan is not required to approve your request even if you have an IRS-approved reason.

The IRS allows hardship withdrawals for only the following reasons:

  1. Unreimbursed medical expenses for you, your spouse, or dependents.
  2. Purchase of an employee's principal residence.
  3. 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.
  4. Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
  5. For funeral expenses.
  6. Certain expenses for the repair of damage to the employee's principal residence.

How it Works

If your plan allows hardship withdrawals, your request will need to be approved either by a committee or a designated representative who has agreed to accept the legal responsibility for making the decision. Because there are a lot of legal issues surrounding hardship withdrawals, the approval process can be very strict; these are rarely "rubber stamp" decisions.

(More...)
Page 1 of 2 NEXT >

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

 


Press Center | Glossary | Privacy Policy | Terms of Use | Contact Us

Creative Commons License
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.