Hardship Withdrawal

401(k) Hardship withdrawals, or 403(b) hardship withdrawals are withdrawals allowed by the tax code for special situations as outlined by the IRS. Per the IRS definition:

“For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee’s spouse or dependent.”

The following reasons can satisfy a hardship withdrawal:

  • Costs related to the purchase of a primary residence
  • Payments of certain medical expenses
  • Payment of post-secondary education expenses for the next year
  • Payments necessary to prevent eviction from or foreclosure on your primary residence.
  • Burial or funeral expenses
  • Repair of damage of an employee’s principal residence

Remember, as I outlined in another section on 401k’s and 403b’s, a hardship withdrawal does not cause you to avoid the 10% early withdrawal penalty for those under age 59 ½ who withdraw from their retirement accounts. It merely gives you access. And remember this little diddy straight from the IRS Website:

“A retirement plan may, but is not required to, provide for hardship distributions”

If you are in trouble, you still may not be able to get the money if your plan document (the guideline for your retirement plan at work) does not allow for hardship withdrawals!

Also according to the IRS, a plan can choose from among the permitted hardship reasons and exclude some:

“If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.”

Remember, as with all tax code provisions, there is more information to hardship withdrawals than what it listed here. Also, the mechanics of planning for the tax hit should be considered. Before taking a hardship withdrawal here are some resources to help you (or contact us below):

IRS Page outlining Hardship Withdrawals

5 Things to Consider Before Taking a 401(k) Hardship Withdrawal (from Chris Grande’s personal website)

401(k), 403(b), 457 Plan Page (WHA)

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Please see my disclaimer page about tax advice on this site – thanks!