About 401k Hardships

Congress made an amendment to the tax code when it added section 401(k) in 1978. This allowed for the deferral of income until retirement through a pension plan. Once the tax law was effective, January 1, 1980, the number of employers that offered this type of pension plan grew by leaps and bounds. In order to ensure that Americans truly kept the money they saved for retirement, they added provisions for penalties if withdrawn prematurely. They also made provisions for loans and 401k hardship withdrawals.

Requirements

You can get a hardship withdrawal from a 401(k) if you met the criteria. It must be necessary to meet immediate and severe financial need. You can't satisfy the need any other way or get the money somewhere else. Your loan can't exceed the amount of money that you require and you've exhausted all the money you can get from loans to the 401k.

Uses

There are only five reasons or uses for the funds that are viable for hardship withdrawals. Take a 401k hardship withdrawal if you purchase a primary residence or need it to prevent foreclosure on your home. You can use it for the payment for tuition, fees and room and board at an institution for higher education. If you show severe financial hardship or have tax-deductible nonreimbursed medical expenses, the money is also available. You don't need to itemize on your taxes to get this hardship exception.

Tax-Free

You don't have to pay penalties if you withdraw the money because you're disabled, have medical expenses that exceed 7.5 percent of your income, have a court order requiring you to give the money to a spouse, child or dependent or are separated from service and over the age of 55. You also can take money on a systematic withdrawal schedule without penalty if you're separated from service and younger than 55.

Warning

The employer is required to withhold 20 percent of any money that you withdraw from your 401(k), even if you take a hardship withdrawal. This means that if you withdraw just enough for the college tuition, you'll fall short of the amount that you need for payment. In order to have enough money, calculate the 20 percent into the amount. Remember at tax time that you have to pay a penalty on the money, unless you fit the exceptions listed above.

Considerations

If you take a hardship withdrawal, don't expect the money the next day. You have specific requirements to prove you have the right to withdraw the money and paperwork to complete before it can proceed. If you think you need to make a 401k hardship withdrawal, call your plan administrator and find out what is necessary to proceed. See how much time the withdrawal takes and make your plans accordingly.