Retirement savings plans such as 401(k), 403(b) and 457(b) plans may offer an option for contributors to apply for a hardship withdrawal. According to the IRS, the plans aren't required to offer a distribution in an emergency. The plan administrator or employer determines if a pension or retirement plan will offer such distributions, which are limited to the amount the worker contributed to the plan.
When emergencies come up, it may be necessary to apply for a hardship withdrawal from your pension. Applying for a hardship distribution from a retirement plan should never be the first option, but under some conditions, it may be appropriate. The Internal Revenue Service sets the guidelines that retirement plan administrators and employers must follow when making distributions from a pension plan.
Types of Hardship
The IRS rules for hardship distributions from a retirement plan include a specific definition of a qualifying hardship. It includes medical expenses, tuition expenses, purchase of a primary residence, funeral and burial expenses, and repair costs for a primary residence. Funds may also be used to prevent eviction or foreclosure involving a primary residence. The individual’s retirement plan may have a stricter definition of a financial hardship.
The qualifying financial hardship must be an immediate need for the individual. When someone has additional resources, such as a second home, the financial hardship doesn't meet the requirements for an immediate need, according to the IRS. Individuals must exhaust other options before requesting a withdrawal from a retirement account.
Suspension from Contributing
Some retirement plans, such as a 401(k), prohibit individuals from participating or contributing for a period after receiving a financial hardship distribution, according to the IRS.
Individuals may withdraw funds from an individual retirement account without meeting the requirements for a hardship distribution. Those withdrawing money from an IRA will pay taxes on the funds and a penalty for early withdrawals. An individual can avoid this penalty if the funds were used to pay health insurance and he has been unemployed for at least 12 weeks.
In addition, penalties may be avoided if the funds were used to pay college tuition for a dependent or the account holder, or for medical expenses greater than 7.5 percent of the account holder’s income. Account holders buying a first residence may withdraw up to $10,000 without an early withdrawal penalty.
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