How to Request a Hardship Withdrawal

A 401(k) hardship withdrawal can only cover "an immediate and urgent financial need" that can't be met from other sources. Check with your 401(k) plan administrator first to determine whether your plan allows this type of withdrawal. If it does, these are the steps you'll need to take:

1. Make a note of your need for a hardship withdrawal.
2. Document your need for the withdrawal. Evidence can include invoices or proof of eviction.
3. Contact your plan administrator to indicate you're ready to make the request.
4. Fill out the required forms.

Remember, you cannot put the money back into your account and you wi🐽ll be required to pay taxes and any applicable penalties on the am💟ount withdrawn.

Qualifying Expenses for Hardship Withdrawals

You qualify for a hardship withdrawal if you need money to pay for certain expenses. These include;

• Medical expenses
• Expenses related to the purchase or repair of your principal residence
• Postsecondary education expenses, including tuition, fees, and room and board
• Funeral expenses
• Paying to prevent eviction or foreclosure on your primary residence

Remember, these expenses can be related to you, your spouse, a dependent, or a 澳洲幸运5官方开奖结果体彩网:beneficiary. And the money you withdraw must be limite🥂d to the amou༒nt needed to remedy the emergency.

Consider the Consequences

If you find yoursꦓelf in financial distress and need cash, a 401(k) hardship withdrawal may be an option for you. But, withdrawing money from your employer-sponsored retirement savings plan has financial consequences.

• You will owe income taxes for that year on the amount you withdraw (if it is a traditional 401(k) rather than a Roth account).
• If you are under the age of 65, you could also owe a 10% penalty tax on the amount taken.

You'll also have to prove, to your employer as well as the IRS, that you have "an immediate and heavy financial need" for the money. Your plan may have rules that make it easier or harder to get the money.

The Details of 401(k) Hardship Withdrawals

Generally, anyone who takes a withdrawal from a 401(k) account before age 59½ is hit with a 10% penalty as well as any income taxes owed on the money. The hardship withdrawal raises that age to 65 but omits the penalty if the IRS concludes that you have proved you have a qualifying hardship.

These IRS barriers are in place because these accounts are designed to help people save for their retirement, not for use as an emergency fund. The hardship penalty acknowledges that emergencies♊ happen.

"When people lack emergency savings, they may feel forced to dip into retirement funds," said Susan Gates, wellness coach and senior manager of services at Boldin Financial. According to Gates, these types of withdrawals are relatively uncommon, with roughly 2% to 3% of participants using them each year.

Example of Taxes Due

ꦆYour hardship withdra🌼wal will be treated as income, which means it will be included in your gross income when tax time comes around.

You will be taxed at your normal tax rate. So, if you withdraw $5,000 and fall into the 22% 澳洲幸运5官方开奖结果体彩网:tax bracket, you'll owe $1,100 on that amount.🌳 You could also owe state taxes on that incoꦅme.

If you must take a hardship withdrawal, you can at least sidestep the 10% penalty if your reason is one of those accepted by the IRS.

Eligibility and Plan Requirements

The IRS states that any hardship withdrawals you make can only come from:

• Your contributions (the IRS calls these elective deferrals)—not any of the earnings on those contributions
• Contributions made to your plan by your employer
• Matching contributions from your employer

You may not qualify for a hardship withdrawal if you can access the funds from another source. For instance, if you, your spouse, or your children have assets that can be 澳洲幸运5官方开奖结果体彩网:liquidated t﷽o pay for your expenses, you are ineligible for the withdrawal.

You can be denied a hardship withdrawal if a medical expense will be reimbursed by your insurance company.

Keep in mind that these requirements are outlined by the IRS but may not apply to your plan. Some plan administrators do not allow hꦉardship withdrawals. Those that do may impose their own conditions on these🌞 types of distributions.

Contact your 澳洲幸运5官方开奖结果体彩网:plan administrator to determine your rights.

Plan-Specific Rules and Documentation

Every plan has its own rules about how and when you can make withdraw🤡als. This includes if you need money to pay for emergency expenses by claiming a hardship withdrawal.

"You must not qualify for personal loans or low-interest borrowing," said Gates. "Some employers even require you to explore a 澳洲幸运5官方开奖结果体彩网:401(k) loan before approving a hardship withdrawal."

If your plan permits hardship withdrawals, you may be required to provide documentation to support your need for the funds. Some examples are medical bills, invoices from a college or university, and 澳洲幸运5官方开奖结果体彩网:bank statements.

The IRS may require that you provide proof that you don't have 澳洲幸运5官方开奖结果体彩网:liquid assets to cover your expenses. Th🦂is includes any assets that are held in your spouse's or minor child's nam♛e.

Financial Implications of a Hardship Withdrawal

You might explore all other avenues before taking money from your 401(k) or other retirement accounts. Aside from the tax hit for taking the withdrawal, you're permanently reducing your retirement nest egg.

"If you’re facing a crisis, there are options beyond a 401K hardship withdrawal. This source of money should be a very last resort," Gates told Investopedia. "While it can provide short-term relief in a crisis, it comes with significant downsides—taxes, penalties, reduced retirement savings, and missed market growth."

Withdrawing money from a 401(K) means you lose out on potential invesꦇtment earnings. The money you have in your account earns interest—and that interest also earns interest, so if you take money out, you cut down the amount you can earn through compounding.

Finally, once you take the money🌜 out, you cannot redeposit the money back into your 401(k).

Non-Penalty Withdrawals

You may withdraw funds from your 401(k) in certain cases without incurring the early withdrawal peᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚnalty. The IRS has a long li⛦st of these exceptions, each with its own cap, and the list can change from year to year.

Some of these exceptions include:

• First-time homebuyers, up to $10,000
• Disaster recovery in a federally declared disaster area, up to $22,000
• Unreimbursed medical expenses that are greater than 7.5% of your 澳洲幸运5官方开奖结果体彩网:adjusted gross income (AGI)
• If you are diagnosed with a terminal illness

Alternative Ways to Access 401(k) Funds

Rather than take 🐼out money as a hardship withdrawal, consider other ways to uꦆse your 401(k) to meet your needs:

• 401(k) loan: Some plans may require you to consider taking out a loan against your 401(k) rather than a hardship withdrawal. You can take out $10,000 or 50% of your vested account balance or $50,000, whichever is greater. Your plan administrator determines your interest rate and all payments go back into your account, including the interest.
• In-service withdrawals: This is a regular withdrawal that occurs from your 401(k) while you're still working. You may be able to remove funds through an in-service withdrawal at any time, depending on your plan. Keep in mind that you will owe taxes on the total amount withdrawn at your ordinary tax rate and you will face a 10% early withdrawal penalty if you are under 59½.

Alternatives

There are other ways to help you cover your emergency expenses. Using savings accounts or 澳洲幸运5官方开奖结果体彩网:emergency fund can help you avoid using your retirement fund.

There are no p༺enaltiesﷺ or tax implications if you have to use these accounts. Withdrawing from taxable investment accounts may also be an option if it harms your long-term financial wellness less than a 401(k) withdrawal.

"You might also consider life insurance cash values (assuming you have this). Cutting costs will also be extremely helpful as it reduces the amount you need," she said. "And, finally increasing income from side gigs or a new job is great if you can do that."

You may qualify for a personal loanꦛ, which leaves your retirement account int🍃act. Check the current rates for personal loans before you apply. Unsecured personal loans have higher interest rates than secured loans such as mortgages.

"If other sources of money are not available to you, starting 澳洲幸运5官方开奖结果体彩网:Social Security earlier than you had intended or getting a loan from your 401(k) are viable options,📖" Gates said.

If you have a 澳洲幸运5官方开奖结果体彩网:Roth individual retirement account (Roth IRA), you can usually tap into it without incurring penalties or taxes. Any earnings are penalized and taxed if you haven't held the account for at least five years before you turn 59½.

The Bottom Line

Retirement accounts like your 401(k) aren't meant for everyday use. They are designed to help you save and grow your money for retirement. Make sure you familiarize yourself with your plan and the associated penalties and taxes before you decide to tap into your 401(k) to cover an emergency. You should also consider speaking with a financial expert to discuss the options and alternatives.