Do You Qualify for a 401k Hardship Withdrawal?

In order for you to qualify for the hardship distribution under the 401K plan, you must meet certain requirements and criteria which are specifically designed to assess your financial predicament. The following information will help you determine your eligibility.

Proof of Economic Hardship

Two of the most important factors that this type of retirement program considers are the urgency of your need and your economic circumstances. Your financial resources are taken into account as to whether you are able to financially provide the monetary demands or not. You may qualify for the 401K hardship withdrawal, if:

  • You have exhausted all available means and proved that you have no other financial resources to sustain your economic needs
  •  Your spouse or other members of your immediate family do not have existing assets that you can use to provide a resolution to your monetary emergencies

Circumstances Recognized as Economic Hardship

You may be qualified for the 401K hardship withdrawal if any of these life events occur and you do not have any other monetary source:

  • When a dependent died and a budget to cover the expenses of a dependent's death which includes funeral, burial and other related costs is needed
  • When your principal home is subject for foreclosure or you are given a notice of eviction from your mortgage lender and cash is needed to avoid these threats from happening
  • When you want to purchase your primary residence and you cannot afford to cover the costs
  • When your residential property suffers damages and you need money for the restoration or renovation of the property
  • When educational expenses like enrollment and tuition fees, board and lodging, projects, books and other school expenses need to be paid for your dependent
  •  When someone has a medical condition, has been hospitalized or diagnosed, and the crisis for money is inevitable to cover medical care expenses

Required Documents

The approval of your application for the 401K hardship withdrawal depends on the authenticity of the economic circumstance you are in and the documentations you presented. Aside from a letter of denial you made for a loan from commercial lenders, these are the following documents you need to secure:

  • Death expenses - invoices of funeral and other related expenses, evidence that shows your relationship to the deceased person
  • Foreclosure/eviction expenses - an official letter of eviction or foreclosure from the mortgage lender
  • Principal home purchase - full documentation of agreement made between you and the seller
  • Home repair expenses - estimation amount of the possible costs including labor
  • College education expenses - documentation from the school stating the amount of school related expenses
  • Medical expenses - medical bills and complete details of the insurance coverage

Hardship Withdrawal

A 401k hardship withdrawal allows a 401k account holder to take money out of her account in order to fulfill a financial need. This process is designed to help individuals who are going through a financial hardship.

In order to qualify for a hardship withdrawal, you must not be able to get the money from some other source. You also cannot withdraw more money than you need for the financial hardship. You must also explore the possibility of a 401k loan before you can try this method of obtaining funds.

There are a few different circumstances that could allow you to get a 401k hardship withdrawal. One situation that could qualify you for a hardship withdrawal is purchasing a primary residence. Another acceptable use of these funds is to pay for college tuition. You could potentially pay for your own tuition, your spouse's or your child's tuition. 

You can also use the money to keep yourself from getting evicted from your home or to prevent foreclosure on a home that you are purchasing. You may also use the money to pay for tax-deductible medical expenses that are incurred by you or one of your dependents. 

Are there any 401k hardship withdrawal tax penalties?

You will face both income tax and penalties if you decide to take a 401k hardship withdrawal from your retirement savings. First, the IRS does not permit this withdrawal under just any circumstance but instead imposes strict rules on eligibility. If you do qualify, you will still have to pay the 20 percent income tax payment and 10 percent early withdrawal penalty for those under the age of 59 1/2. Thankfully, the IRS does allow you to include these anticipated penalties in the sum you withdraw from the account if you qualify for hardship. As a result, you can still take out the amount needed to face hardship without paying penalties out of the sum directly.

What documents are required for a 401k hardship withdrawal?

You will need to supply information showing that you have no other options but to take a 401k hardship withdrawal in order to be approved for this financial step. You are permitted to take the withdrawal only if you can show that you will use the money to pay for one or more of these expenses:

  • Medical expenses
  • Mortgage payments on a principal residence only
  • Tuition for postsecondary education
  • Money for rent to prevent eviction from a principal residence only
  • Funeral expenses
  • Expenses related to the repair of damage to a principal residence only

Beyond showing that the money will be used for one of these purposes, you must also prove that you have attempted but failed to secure the money through other means. A statement of facts will prove this part.