Taking a hardship withdrawal from your retirement account is one way to bail yourself out of financial troubles. However, a hardship withdrawal must be your last resort once you've exhausted all other possible options. Although retirement plans must specify what represents a financial hardship for the purpose of withdrawing money from the plan early, the IRS does not list job loss as an immediate and heavy financial burden. Other resources such as unemployment compensation, food stamps and state welfare programs are available to meet that need.
Some retirement plans such as 401(k), 403(b) or 457(b) plans provide for hardship distributions. If a retirement plan allows you to withdraw money, it must outline what qualifies as a hardship need. In most cases, you must give your employer information showing you are experiencing a financial hardship and have no other resources available to you to satisfy the need. Usually, a retirement plan will stipulate what kinds of information you must provide. One drawback to choosing this course is that you may not make contributions to the plan for at least six months after receiving the hardship distribution. You will also probably have to pay the 10 percent penalty on early withdrawals unless your hardship is specifically tied to medical expenses or your own disability. The hardship withdrawal rules, in general, are designed to let you take your money out of your 401(k), but not to avoid taxes and penalties.
401(k) Hardship Withdrawal
Under certain situations, the IRS will allow you to withdraw money from your 401(k) plan before you reach 59 1/2 years old. Unlike a loan, you don't have to pay back the money, but it will reduce the amount in your retirement account. According to the IRS, you can make a hardship withdrawal to prevent foreclosure on your principal residence. You can also do so to pay unreimbursed medical expenses for yourself, your spouse or your dependents, pay funeral expenses, or pay college tuition for yourself, your spouse or your children. You may also withdraw money to pay toward the purchase of your principal residence or repair severe damage to your home after a fire, storm or natural disaster. And you can withdraw money from your 401(k) if you are laid off at age 55 or later. The IRS does not allow you to withdraw more money than you need. Generally, the same rules for hardship distributions apply to 403(b) plans.
457(b) Hardship Withdrawal
You can take a hardship distribution from a 457(b) plan only in the event of an unforeseeable emergency. A situation such as sudden illness or accident or the unexpected loss of property because of a catastrophe generally qualifies as an unforeseeable emergency. The qualifying event must be unavoidable and beyond your control. You must not be able to cover the expense by any other means. Unlike a 401(k) plan, needing money to buy a home or pay for college tuition does not qualify as a reason for a hardship distribution under a 457(b) plan. Even for an event that qualifies as an unforeseeable emergency, you may not withdraw more money than it will take to cover the financial need. The emergency must somehow involve you, your spouse, your minor child or other dependent, or your plan beneficiary.
IRA Hardship Distribution
In most cases, you can withdraw money from an IRA when you need it. However, unlike your 401(k), you can withdraw money from your IRA without paying the 10 percent early withdrawal penalty if you meet the hardship requirements, which are similar to the rules for 401(k) withdrawals. So, taking a distribution from an IRA to buy your first home or pay higher education expenses qualifies for exemption from the early distribution tax, as does taking money to pay medical expenses in excess of 7.5 percent of your income, or to cover expenses if you become disabled.
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