Withdraw 401k Financial Hardship
A 401k plan restricts when you can take money out to when you are at least 59 1/2 years old, permanently disabled, no longer working for the company or suffering from a financial hardship. Knowing what constitutes a financial hardship for a 401k plan and the penalties and taxes involved will help you determine if you are eligible and if it is in your best interest to use the 401k funds to help you through your financial hardship.
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Qualifying Hardships
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For a qualifying hardship, you must show an immediate and heavy financial need for which you do not have other resources that you can use. Examples of expenses recognized to constitute immediate and heavy financial needs include medical care for yourself, your spouse or your dependents, purchasing your first primary residence, paying for tuition, room and board for secondary education for yourself, your spouse or your dependents, paying rent or mortgage to avoid eviction from your primary residence, funeral costs and certain expenses for the repair of damage to your primary residence.
How Much Can Be Withdrawn
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The amount of your hardship withdrawal cannot exceed your financial need plus any income taxes and penalties on the hardship withdrawal. In addition, the amount that you can take out for the hardship cannot exceed the amount of elective deferrals, or contributions, that you have made to the account. However, you cannot take out any matching contributions made by your employer, or any returns on your contributions, for a hardship distribution. For example, if you have contributed $20,000, your employer made $20,000 in matching contributions and your 401k plan includes $7,000 in earnings, you would only be able to take out $20,000.
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Penalties
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You must include the amount withdrawn from your 401k plan for a hardship distribution as part of your taxable income for the year. In addition, you must usually pay an extra 10-percent tax penalty unless an exception applies. Exceptions include medical expenses exceeding 7.5 percent of your annual adjusted gross income or if you have a permanent disability. When filing your taxes, figure your taxes using Form 5329 and use Form 1040 to file your income taxes.
Documentation
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Each 401k plan can set the rules for what documentation, if any, must be shown before allowing you to take a hardship distribution. The employer may not require you to provide any documents at all. However, the IRS prohibits the employer from allowing you to take hardship distribution if you can satisfy the financial need from other sources, such as insurance reimbursement, selling assets, not making further elective contributions to the 401k plan or borrowing money from other sources, such as a bank or taking a 401k plan loan.
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