Hardship Withdrawal

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Hardship Withdrawal

A withdrawal from a retirement account such as a 401(k) or an IRA made before the age of 59 1/2 because of financial need. In order to make a hardship withdrawal, one must demonstrate the financial need, such as the need to pay medical bills or tuition for college. Even so, a hardship withdrawal is usually subject to a penalty tax.

Hardship withdrawal.

A hardship withdrawal, also known as a hardship distribution, occurs when you take money out of your 401(k) or other qualified retirement savings plan to cover pressing financial needs.

You must qualify to withdraw by meeting the conditions your plan imposes in keeping with Internal Revenue Service (IRS) guidelines. For example, you may have to demonstrate how urgent the situation is and prove you have no other resources.

Some allowances are purchasing your primary home, covering out-of-pocket medical expenses for yourself or a dependent, and paying college tuition for yourself or a dependent.

However, if you're younger than 59 1/2, you must pay a 10% penalty plus income tax on the amount you withdraw. You also may not be permitted to contribute to the plan again for six months.

Hardship Withdrawal

A withdrawal from a section 401(k), section 403(b), or section 457 plan that is permitted when the plan participant has an immediate and heavy financial need and the withdrawal is necessary to meet that need.
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Expected changes to the rules applicable to governmental retirement plans that were designed to bring these plans more in line with other qualified plans were not enacted, nor were changes designed to relax the retirement plan hardship distribution rules.
Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules.
The requirements necessary to take a hardship distribution are clearly stated in the plan document and in ERISA guidelines.
This violation generally occurs when a participant qualifies for and receives a hardship distribution, and should have his or her elective pre-tax and after-tax deferrals suspended for the balance of the plan year following the hardship distribution, but the contributions are not suspended as required.
Before you can take a hardship distribution, you must have taken other permitted withdrawals and loans from qualifying Company plans.
Answer--Regulations require that a hardship distribution meet two conditions: (a) the distribution must be necessary in light of immediate and heavy financial needs of the employee, and (b) funds must not be reasonably available from other resources of the employee.
The withdrawals do not have to be repaid, but the employee must pay taxes and any applicable penalties on the hardship distribution.
For example, loan and hardship distribution features may rarely be used by a high-income group and, when used, may require very little administrative time and effort.
For example, the automatic enrollment provisions for 401(k)and 403(b) plans are already in effect, so you may wish to provide hardship distribution to beneficiaries who are neither spouse nor the the dependent of the plan participant.
distributable amount: Typically an employee's distributable amount, for purposes of a hardship distribution, is limited to the total of his elective deferrals, less any prior hardship distributions.
Currently, a plan may make a financial hardship distribution only where it is necessary to meet an immediate and heavy financial need of the employee.
In addition, you won't be allowed to make elective contributions into your 401(k) plan for the 12-month period following the hardship distribution.