401k Hardship Withdrawal & 401k Loans

It may be possible for you to access 401k money if the following four conditions are met (note that employers are not required to provide 401k hardship withdrawals, so check with your plan administrator):

• The withdrawal is necessary due to an immediate and severe financial need
• The withdrawal is necessary to satisfy that need (i.e., you can’t get the money elsewhere)
• The amount of the loan does not exceed the amount of the need
• You have already obtained all distributable or non-taxable loans available under your 401k plan

If these conditions are met, the funds can be withdrawn and used for one of the following six purposes:

• A primary home purchase
• Higher education tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you)
• To prevent eviction from your home or foreclosure on your primary residence
• Severe financial hardship
• Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents
• Funeral expenses

All 401k hardship withdrawals are subject to taxes and the ten-percent penalty. This means that a $10,000 withdrawal can result in not only significantly less cash in your pocket (possibly as little as $6,500 or $7,500), but causes you to forgo forever the tax-deferred growth that could have been generated by those assets. 401k hardship withdrawal proceeds cannot be returned to the account once the disbursement has been made.

Non-Financial Hardship 401k Withdrawal

Although the investor must still pay taxes on non-financial hardship withdrawals, the ten-percent penalty fee is waived. There are five ways to qualify:

• You become totally and permanently disabled
• Your medical debts exceed 7.5 percent of your adjusted gross income
• A court of law has ordered you to give the funds to your divorced spouse, a child, or a dependent
• You are permanently laid off, terminated, quit, or retire early in the same year you turn 55 or later
• You are permanently laid off, terminated, quit, or retired and have established a payment schedule of regular withdrawals in equal amounts of the rest of your expected natural life. Once the first withdrawal has been made, the investor is required to continue taking them for five years or until he/she reaches the age of 59 1/2, whichever is longer.

Loan Alternative

Remember, once you take the money out of your plan using a hardship withdrawal, you can't put it back in and you lose for life the tax advantage on those funds.

A hardship withdrawal is not a loan. You can't repay it. You should see if your plan offers a 401k loan as an alternative to taking a financial hardship withdrawal. Plan loans are not subject to taxes or penalties, and you can continue to contribute to the plan while you repay the loan. (Some plans will even require you to exhaust your possibilities for a loan before taking a hardship withdrawal.)

However, if you leave your employer before the loan is repaid, you must pay back the remaining balance otherwise it will be considered a withdrawal and subject to applicable taxes and penalties.

As always, consult with your financial and tax professional for advice specific to your situation.