How to avoid a 401(k) hardship withdrawal

401(k) hardship withdrawal recap

• Remove funds from your 401(k) and you may be subject to tax penalties.
• Stunt the growth of your retirement funds and impact your ability to retire.

The qualification process

You’re looking for emergency funds and think a 401(k) hardship withdrawal is the next step. In order to qualify, you’ll have to explore every corner of your finances, assets and benefit opportunities to prove you can’t get the funds any other way.

During this process, you may find funds where you thought there were none. Here’s what it takes to qualify for a 401(k) hardship withdrawal:

1. Ask if your 401(k) plan has hardship language. Not every plan provides for hardship distributions, since it’s not required. You need to find out if you have the option.
2. Create a budget. The IRS will not allow you to take more funds than are needed from your 401(k), so you’ll need to comb through your monthly expenses to determine exactly how much is required to meet your hardship need.
3. Find your number. Once you have a budget, you’ll know the correct amount you need to withdraw, which can include payments for taxes or penalties that result from the distribution.
4. Start the search. You’ll only qualify if you’ve gone down every possible avenue to secure emergency funds. And you’ll have to prove it.

This begins with a thorough look at:

• Distributions from other employer plans.
• Insurance reimbursements.
• Assets you could liquidate.
• Government benefit options.
• Loans available from a bank.
• And more.

Give proof of hardship. If you cannot find alternative emergency funds after taking these steps, you can present proof to your plan administrator that you’ve obtained all the distributions and benefits that are available to you, and still do not have enough money to remedy your hardship.

Find a better option

The qualification process may lead you to money you didn’t know was available, eliminating the need for the hardship withdrawal altogether. If you can gain emergency funds in any other reasonable way, you’ll be able to protect your retirement savings and your future.

Action steps:

• Create a budget, including all your monthly expenses and bills.
• Determine the amount you need from a hardship withdrawal.
• Search for other ways to find emergency funds.
• Talk to a financial advisor to get started.

Learn more

• Understand a 401(k) hardship withdrawal
• Alternatives to a 401(k) hardship withdrawal