As you know, the United States was hit hard this year by tornadoes. There was a record number of EF5, the most fierce of all tornadoes. The death toll is now the highest it has been since 1950. Many have lost homes, cars, and businesses. As a result of these natural disasters, many have been left in a financial disaster. If you or your employees were affected by the tornadoes, or any other similar disaster that damaged their homes and need financial assistance to repair their residences or cover other disaster-related expenses, it might be a good idea to begin talking about possibility of taking a 401k hardship withdrawal.
Qualifiers for a 401k Hardship Withdrawal
In order to take a hardship withdrawal, there are several things that need to be in place. These include:
- There must be an immediate and severe financial need.
- Money from the withdrawal is absolutely necessary; it cannot possibly come from anywhere else.
- The amount withdrawn does not exceed the amount needed.
- Any other non-taxable or distributable loans available under your 401k plan have already been taken advantage of.
Please bear in mind, that in order to take a 401k hardship withdrawal, a 401k plan participant must have exhausted allother monetary resources. Also note that not all plans allow for hardship withdrawal. Additionally, you should be aware that you cannot repay hardship withdrawals into the plan and you will owe taxes and penalties on those distributions. After taking out a hardship withdrawal, you cannot make contributions to your 401k for six months.
What Exactly Can a Hardship Withdrawal be Used For?
If all of these restrictions have been met, the a hardship withdrawal is possible. There are six primary things the Internal Revenue Service deems acceptable to use a hardship withdrawal for. These sixth things are:
- The purchase of a primary residence.
- To avoid eviction from your primary residence or to prevent foreclosure on your primary residence.
- Higher education room, board, tuition, fees, etc., payable within the next twelve months for you, your spouse, or your dependents.
- Medical expense for you, your spouse, or your dependents that are tax deductible.
- Funeral expenses.
- The repair of certain damages to your principle residence.
401k Hardship Withdrawal: Not an Ideal Solution, but a Viable One
Is it an ideal solution? No. But at least your employees may have some financial resource which may be accessed to rebuild their lives. If you have any questions regarding the hardship withdrawals or plan loans please contact us or your plan consultant for help.