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401k Hardship Withdrawals - An Overview



The hardship rules are only relevant while you still work for the sponsor of your 401k. Once you are separated from service (through permanent layoff, termination, quitting or retirement), the hardship rules do not apply.

* Certain Expenses for the Repair of Damage to the Employee's Principal Residence

Repairs to a principal residence must fall under the IRS's description of a casualty loss in order to qualify for a hardship withdrawal. The damage must be from an event that is sudden, unexpected, or unusual. Damages resulting from progressive deterioration of your residence due to normal wear and tear, normal weather conditions, or a pest infestation are not considered casualty losses.

Casualty losses can result from a number of causes, including the following examples: earthquakes, fires, floods, vandalism, and storms, including hurricanes and tornadoes. Some examples paraphrased from IRS Publication 547 (www.irs.gov/pub/irs-pdf/p547.pdf) that illustrates what would be considered a casualty loss and what would not:

Example 1: The deterioration of a water heater that burst is not considered a casualty loss; however the resulting damage to the home due to the water would be considered a casualty loss.

Example 2: The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests is not considered a casualty loss. However, a sudden destruction due to an unexpected or unusual infestation of insects may result in a casualty loss.

Example 3: The steady weakening of a building due to normal wind and weather conditions is not considered a casualty loss. However, damage done by hurricane winds may result in a casualty loss.

Other 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
What to Collect When Processing a Hardship Distribution

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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.


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