In tough economic times, you may need additional means to
make ends meet. A hardship loan against your 401(k) is strictly regulated by
the Internal Revenue Service and can often create additional hardships that
could be more of a burden for you later.
Hardship loans on a 401(k) are available, but the
restrictions are significant and the tax burden they create may not be helpful
to you in the end. It is also important to understand that a "loan"
implies the ability to repay. However, a 401(k) loan cannot be deposited
back to your 401(k).
With a hardship withdrawal there are specific prohibitions
against putting the funds back into your 401(k) and in fact, you may also be
restricted from adding funds for six months after such a withdrawal.
Additionally, you will pay up to 35% in taxes plus a 10% withdrawal fee. If you
still feel that a hardship withdrawal is the best way of securing emergency
funds, here are the IRS
defined rules for a hardship withdrawal and the documentation
required:
- College
Tuition - You can borrow against your 401(k) under the hardship
withdrawal feature for tuition for yourself or a qualified family member.
You will be required to obtain a tuition statement from the educational
institution and proof of the student’s relationship to you.
- Medical
Emergency - If you need funds to pay for extreme medical expenses
this may be qualified under a hardship withdrawal. Medical bills will be
required for this type of withdrawal. If you are having a procedure done
that is requiring you to pay out of pocket, your plan administrator may
accept a statement from the medical facility about anticipated expenses.
- Funeral
Expenses - You may request a hardship withdrawal for funeral
expenses for a family member. This will typically require a death
certificate and proof of your relationship to the deceased.
- Principal
Residence - A hardship withdrawal may be used to make a down
payment on a primary residence, stop foreclosure on a primary residence or
prevent eviction (if you rent). A hardship loan cannot be used for second
homes or investment properties. The documentation required in this
instance would be the foreclosure letter or eviction notice.
A 401(k)
hardship withdrawal should only be used as a last resort. Since the
funds cannot be placed back in your 401(k) you will be diminishing the amount
that will be available when you retire. Contact your 401(k)-plan administrator
to see if they have special forms that must be used to request a hardship
withdrawal against your 401(k).
