Ok, so you are young and invincible. But financial hardships can still strike you at any time. As a general rule, you should avoid taking a hardship withdrawal from your 401(k) plan because of the income taxes and additional penalties. Not only that, but you can't contribute to the 401(k) plan for at least six months after the distribution. Still, sometimes you can't avoid it. Even though hardship distributions are allowed by the IRS, they are not mandatory, so your 401(k) plan might not be as generous in granting hardship requests. To request a distribution, you need to explain in writing why you need the distribution.
Review your 401(k) plan documents to determine for what reasons, if any, the plan permits a hardship exemption. Examples the IRS regulations permit include significant medical expenses, purchasing a primary residence, tuition and fees, preventing eviction, funeral expenses, and repairing your primary residence. However, your particular plan might be more restrictive on what it permits. Sorry, but your hankering for a new flat screen TV or Mustang convertible doesn't count. The plan documents should also specify who the letter needs to be addressed to.
Calculate the amount you need to withdraw. IRS rules permit you to take a hardship distribution only from your elective deferrals -- not your employer's contributions on your behalf. The amount is limited to the amount of the need plus any applicable taxes.
Make a copy of documents supporting your hardship claim to mail with your letter. For example, if you need money to avoid foreclosure, copy notices from your lender. If you have medical expenses, attach copies of the bills.
Write the letter clearly stating your reason for the hardship distribution and the specific amount you need. If you are married, have your spouse sign off on the letter as well. For example: "I am requesting a hardship withdrawal of $10,000 from my 401(k) plan because I need to pay that amount to avoid being evicted from my home."
Make a copy of your letter for your records and then mail it to the appropriate person in your human resources department. You will be notified in writing if your request is denied.
- You must exhaust other sources of funds before requesting a hardship withdrawal. A company is not permitted to make a hardship distribution if it is aware that you could mitigate the hardship with funds from insurance, liquidating your assets, stopping elective deferrals, taking a loan from the plan, or borrowing from banks.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."