IRS Definition of Financial Hardship

Retirement savings can be withdrawn without penalty if they are used to pay medical expenses or other immediate financial needs.

It might be possible for individuals who are facing financial problems to withdraw some of their 401(k) retirement savings without being penalized by the IRS. However, they must meet the IRS definition of financial hardship to do so.

Facts

If an individual withdraws any money from his retirement savings account before he turns 59 1/2, the IRS will charge a 10 percent penalty fee unless that person can prove that his withdrawal was made due to a financial hardship.

Definition

According to IRS regulations, a financial hardship occurs when an individual has an immediate and heavy financial need and the money they withdraw from savings is necessary to meet that need.

Immediate and Heavy Financial Need

An immediate and heavy financial need only exists when an individual needs money to pay for medical care, education costs, funeral expenses or to maintain his home. The cost of maintaining a home includes buying, repairing or keeping the home out of foreclosure.

Necessary Withdrawal

For the IRS to consider a withdrawal necessary, the individual must not have any other assets that can be used to help pay for his financial need. This can include the assets owned by a spouse or the couple's children.

Dependents

Under the IRS definition of hardship, the financial need also can be that of the individual's spouse or dependents.

References

• IRS: Retirement Plans FAQs Regarding Hardship Distributions
• Money-Zine: 401k Hardship Withdrawal