Does the IRS Consider Job Loss a Hardship?

When you put money away into a retirement account, there are restrictions on when that money can be used. While this helps many people save for retirement, there are also times when you may need to access your retirement savings early. In these situations, you may need to meet certain requirements or face a penalty for withdrawing your money early. One of the situations in which you may want to take an early withdrawal from your retirement account is unexpected job loss. Job loss can be a scary and stressful event, but the IRS does not consider job loss itself to be a basis for a hardship withdrawal.

The IRS requires an "immediate and heavy financial need" in order to be eligible for a hardship withdrawal from a 401(k). The IRS categorizes some expenses as immediate and heavy, including certain medical expenses, costs associated with buying a home or avoiding foreclosure or eviction, tuition and educational expenses and funeral expenses. Losing your job is not automatically considered an immediate and heavy financial need. But if you lost your job and need to withdraw money from your retirement account in order to protect yourself from eviction, that would likely qualify you to take a hardship withdrawal from your retirement account.

Usually, your 401(k) plan will have specific steps you need to follow if you wish to take a hardship withdrawal. These steps may vary depending on your 401(k) plan. Usually, you will have to make a representation to your employer that you are experiencing an immediate and heavy financial need and that you can't get the money needed from a different source. If your employer knows, however, that you don't have a true financial need that can't be met through other sources of income, then they can't authorize a hardship withdrawal.

The amount of money you can receive from a hardship withdrawal can only be the amount of money necessary to cover the financial need. For example, if you lost your job and need to make a hardship withdrawal in order to avoid foreclosure on your home, you could only request a distribution equal to the cost of keeping your house. Additionally, you can only withdraw the amount of elective contributions you have made to the account. Plans vary on whether you are allowed to withdraw matching contributions from your employers as part of a hardship disbursement.