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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.

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.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary
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"The law changed the rules for 401(k) loans and hardship withdrawals, making it easier to draw the money directly as a hardship without first getting involved in the loan process."
… The law changed the rules for 401(k) loans and hardship withdrawals, making it easier to draw the money directly as a hardship without first getting involved in the loan process.
Following is a look at updates regarding plan operations: 1, the Internal Revenue Service's cost of living adjustment to the maximum elective deferral limit to Code Section 401(k), 403(b) and 457(b) qualified retirement plans; 2, the Bipartisan Budget Act's changes to the Code Section 401(k) hardship withdrawal rules; and 3, the Internal Revenue Service's recently published Proposed Rule addressing, among other topics, the Tax Cuts and Jobs Act's changes to the definition of "casualty" in Code Section 165 and the effect of this change on Code Section 401(k) plan hardship withdrawals.
As long as the applicable regulations are followed throughout the loan term, the transaction is not subject to tax or an early-withdrawal penalty (if under age 59 ) as would be the case with most outright distributions from a retirement plan, including hardship withdrawals. From the plan sponsors' perspective, compliance with these regulations is necessary to maintain the favored or "qualified" tax status of the plan.
Furthermore, an employee cannot make voluntary salary deferrals to a SEP or take loans and hardship withdrawals from one.
The course will review the following: An overview of 401(k) Plans, Legislative History of 401(k) Plans, Advantages and Disadvantages, Steps to Establish a 401(k) Plan, Types of 401(k) Plans, Design Options and Objectives, Participation Requirements, Loans, Hardship Withdrawals and In-Service Distributions, Life Insurance Inside 401(k) Plans, and Annuities Inside Qualified Plans.
Levels of hardship withdrawal activity also were low, with only 0.9% of DC plan participants taking hardship withdrawals during the first half of the year, similar to the first half of 2016.
Documentation requirements may be reduced, although repayment rules are unchanged; the deadline for hardship withdrawals under the hurricane provisions is January 31, 2018.
A profit-sharing plan may permit loans and hardship withdrawals, but withdrawals before age 59 Vi may trigger income tax plus an additional tax of 10%.
Hardship withdrawals (which are different from a loan, which must be repaid to the plan) from 401(k) plans may also be possible in certain circumstances.
"They can take out hardship withdrawals for true emergencies or things that might not be such true emergencies but they didn't plan well for," he said.