Taking Hardship Withdrawals |
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What's a Hardship? |
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Only specific expenses qualify as financial hardships:
- Out-of-pocket medical expenses
- Down payment on a primary home
- College tuition due within 12 months
- Threat of mortgage foreclosure or eviction
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You may be able to withdraw from your account to meet the needs of a real financial emergency, but it's not an easy process. In fact, the drawbacks may outweight the benefits.
A hardship withdrawal is just what it sounds like—a withdrawal from your 401(k) account to help cover the costs of a serious financial emergency. But even if your plan allows these withdrawals, and not all plans do, you should probably think of it as a last resort.
If you do apply, your plan will probably require you:
- To prove that your situation qualifies as a hardship, usually by providing itemized bills or other supporting documents
- To show you can’t get the money you need any other way
You may be expected to withdraw any after-tax dollars you’ve contributed to your 401(k) account, borrow the maximum permitted from the plan, and apply for commercial loans as part of the qualification process.
If your application is approved, you can usually withdraw the money you contributed, but not your employer’s contributions, if any, nor earnings that have accumulated in the account. For example, if you contributed $50,000 to an account valued at $195,000, your maximum hardship withdrawal would be $50,000. The only exception applies if you began contributing before 1989. Then you might also be able to withdraw earnings credited to your account before December 31, 1988.
Finally, your plan administrator may follow up after the withdrawal to verify that you used the money as you indicated you would in your application. And you’ll have to wait six months before you can again contribute to your plan.
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