IRS Changes 401K Hardship Withdrawal Information

There’s no question that it has been a tough time for many Americans. With unemployment rates at the highest level we’ve seen in decades and companies cutting budgets left and right, many people how found themselves without a steady income. Once the savings accounts have run dry and you’ve exhausted all other options, it seems there is no other choice than to break into your 401K. Usually, a withdrawal from your 401K before it has fully matured results in heavy taxation and many penalties. Well, the IRS has recently updated their 401K Hardship Withdrawal Information, and while you will still owe taxes to the IRS, you will not owe any penalties on the withdrawal. We’ve got the some of the details associated with a 401K Hardship Withdrawal, but please turn to a qualified tax planner or preparer for specifics and answers to your questions.

How do you know if you qualify for a hardship distribution from your retirement plan? Each plan should provide the specific criteria that they use to determine a time of hardship. Be sure to examine your plan’s policies carefully because most of the time they will detail what payments can be made with a hardship distribution, for example you can use the money for medical expenses but not tuition. For a 401k specifically, the IRS states the hardship “must be made on account of immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee’s spouse or dependent.”

As far as the amount in which you can withdrawal, you cannot take out more than you have put in.

If you choose to receive a hardship distribution from your retirement plan, more than likely you will be unable to contribute to the plan for at least six months plus the additional taxation on the withdrawal. Receiving a hardship distribution is not a decision you should take lightly because it can have serious effects on your retirement plan. Please consult a qualified tax accountant for guidance if you are considering a hardship distribution.

We’ve given a brief overview of the 401K Hardship Withdrawal Information, but there is a much more in-depth article on ThinkGlink.com. Of course you could always visit the IRS website directly or talk to your tax accountant.