Hardship Withdrawals From Your 401k Plan

Hardship withdrawals represent amounts that can be withdrawn from your 401k plan, much like a loan. Even though this withdrawal is allowed by the law, it does not mean that your employer will allow such a withdrawal from the 401k plan that he provides. Some companies do, while others simply don’t. The first thing you have to do therefore is check with your company’s Human Resources Department whether such a withdrawal is allowed.

According to the regulations provided by the IRS with regards to 401k plans, hardship withdrawals may be allowed only in certain circumstances as follows:

• You need to withdraw, due to a serious and pressing financial need
• You do not have other means by which to meet this need
• The amount taken should not exceed, the amount that you need
• You have already taken all the non taxable loans that the 401k plan offers
• You have no means by which to contribute more funds into the 401k plan, for the six months after your withdrawal.
The IRS considers the following reasons as acceptable, for a contributor to make a hardship withdrawal:
• For the reimbursement on medically related expenses
• For the employee to purchase his main residence
• To pay for education expenses such as tuition or room cost and board, for the next 12 months.
• To make payments that will prevent you from being evicted from your home, or to prevent your property from being foreclosed
• To cover any funeral expenses, as well as to repair the main residence.

These withdrawals are always subject to income tax, as well as a penalty. Only contributors who are over 59 and a half years or age, are exempt from the 10% penalty. The amount of money that you withdraw does not have to be paid back into the account.

Reference: http://www.401khelpcenter.com/faq/faq_main.html