Withdrawal

A hardship withdrawal must always be your last resort. Remember, if things are really bad and you are required to file for bankruptcy your money in a qualified retirement plan are protected from creditors. Seek professional help before you make a mistake which cannot be reversed.

WASHINGTON - OCTOBER 26: Internal Revenue Ser... — WASHINGTON - OCTOBER 26: Internal Revenue Service Commissioner Douglas Shulman addresses the American Institute of Certified Public Accountants' 35th Annual National Tax Conference October 26, 2010 in Washington, DC. Shulman addressed a new IRS program requiring that anyone making money from completing tax returns must register with the IRS, pay a fee and pass competency tests and eventually attend continuing education programs. (Image credit: Getty Images via @daylife)

Hardship requirements

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

via insight.milliman.com

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.