Hardship Withdrawal 401K Use For Extreme Emergency Only
A 401k retirement account is structured to take care of you during your life after work but, it might be a life saver sooner than you expected. Many people find themselves short of funds do to the recent economical downturn that affected everyone̢۪s assets or became disabled without the ability to earn a sufficient income. If you are under the age of 591/2 your 401k retirement investment account might be the answer if you qualify for a hardship withdrawal. How do you do that? Most 401k accounts have roll over and hardship withdrawal provisions in the retirement plan since most employees want to be able to access the funds in an emergency and take the plans when they leave.
There are two categories of hardship withdrawals; financial and non financial with slightly different IRS qualifications that adhere to very strict and detailed guidelines. All 401k Hardship Withdrawals are subject to IRS income taxes and a ten-percent penalty bases on the amount you withdraw with some exceptions for non financial hardships. The IRS provides for a financial hardship if all the following five conditions are met: 1. Immediate and severe/ heavy financial need 2. Can̢۪t get the money anywhere else to satisfy that need 3. Only be the amount of the detailed need 4. All distributable or non-taxable loans available under your 401k plan have been used 5. Can not contribute to the 401k plan for one week or six months after the withdrawal depending on the certification of financial records substantiating the need The certified hardship amount can be withdrawn from your 401k investments if used for at least one of the five following allowable hardships: 1. Primary home purchase 2. Higher education tuition, room, board and fees for the following twelve months for you, spouse, dependents or children (no longer dependent) 3. Eviction or foreclosure from your primary residence 4. Medical expenses not reimbursed to you, spouse or dependents 5. Funeral expenses and repair of a primary residence .
The financial hardship withdrawal process has penalties while the non-financial hardship is much more penalty friendly. The investor/employee still pays the IRS taxes on the non-financial hardship 401k account withdrawals but, the ten-percent penalty is waived if you qualify meeting one of the following five conditions. 1. Totally and permanently disabled 2. Medical debts more than 7.5 percent of your adjusted gross income 3. Divorce decree orders you to give the 401k funds to your ex spouse, a child, or a dependent 4. Permanently laid off, quit, terminated, or early retirement in the same year you turn 55 or later 5. Permanently laid off, quit, terminated or retired and have prepared a schedule of regular withdrawals in equal amounts based on your life expectancy.
Once the first withdrawal occurs, the investor is required to continue taking withdrawals until the age of 59 1/2, or five years whichever is longer. In either hardship case the employee is not able to make up the funds and realize the tax deferred growth of the hardship withdrawal amounts. Your investments will take additional years to make up the difference in the plan value. Remember that a $25, 000.00 hardship withdrawal will result in $15, 000-$17, 500 after you deduct the IRS income taxes and any penalty if under 591/2.
An alternative is a 401k loan that is allowed by the IRS with restrictions and guidelines. Some employers provide this service but smaller firms may not because of the extra paper work costs. Check with your HR personnel because this loan amount can be returned to your retirement account through regular repayments designated by your employer without a penalty which could be a better choice if available.
A 401k hardship withdrawal may be the last resort if all other sources including loans and gifts fail. Do not forget that an IRA has a $10, 000 lifetime withdrawal exemption for a residence without a penalty. Do your homework and select the process that best suits your individual situation.
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