There are two main requirements that need to be satisfied to qualify as a hardship. The first is that the hardship withdrawal must be due to an immediate and heavy financial need. The IRS uses the examples of buying a boat or a television as situations that would not qualify under this condition.3 The second requirement is that the amount distributed under the hardship be restricted to the necessary funds needed to satisfy the financial need.4 This means that a participant can’t receive a hardship withdrawal in the amount of $10,000 when only $2,000 is needed.
The amount available for distribution is generally restricted to the amount the participant has contributed to the plan (without earnings). Some plans do allow employer contributions to be available as well, but this is not as common. In addition, the hardship withdrawal is not rollover-eligible, meaning that the funds distributed cannot be placed in an IRA or another qualified retirement plan to keep its tax deferred status.
What qualifies as a hardship?
The determination of what qualifies as a hardship is usually, but not always, based on “safe harbor” standards. These standards are outlined by the IRS to help plan sponsors determine if a participant’s situation qualifies as a hardship event. The eligible hardship events under the safe harbors are:
- Medical care expenses that have been incurred or for medical care that is needed
- Costs associated with purchasing a principal residence (excluding mortgage payments)
- Tuition payments, educational expenses, or room and board expenses that will be incurred during the next 12 months of postsecondary education
- Payments to prevent either eviction or foreclosure on a principle residence
- Funeral expenses
- Certain expenses related to repairs of a principal residence that are due to damage
When you are considering a hardship withdrawal please seek the advice of a professional. This added expense may help avoid a costly mistake which cannot be reversed.
Please comment or call to discuss how this affect you and your retirement future.
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- 4 Questions to Ask Before Borrowing from Your 401(k) (money.usnews.com)