How do 401k Hardships Work?
The purpose of a hardship distribution is to make available funds in the event of a hardship you are experiencing financially. Most employer sponsored plans provide access to 401K funds regarding a hardship distribution.
An important thing to think about regarding a hardship distribution is if you process one, you will not be able to participate in the 401k plan for 6 months. This also means you will not be able to participate or benefit from your employer match contribution as well.
Another aspect to consider is the tax impacts of the hardship distribution. Just because you have access to your 401K, does not mean you are avoiding the taxes and penalties that are assessed on it. So, for example, if someone makes a distribution from their 401k plan, there is a 10% penalty assessed on their taxes plus federal and state taxation. (Tax amount depends on current state of residency).
For you to process a hardship distribution with your employer, they (your employer) must approve the distribution. And the hardship must qualify based on IRS rules on what they (the IRS) determine as a hardship.
Based on IRS rules, there are 6 reasons to access your funds due to a financial hardship:
1. Purchase of Primary Residence
a. A second option is a 401K loan. You can borrow up to 50% or $50,000 of your 401k, but the loan must be repaid within 5 years to avoid penalties.
2. Payment to Avoid Eviction or Foreclosure of your Primary Residence
3. Certain Repairs to Fix Damage Done to your Home
a. Most 401k hardship distributions are for storm related damages. A second option to consider is a 401k loan.
4. Medical Related Expenses
5. Tuition and Education Related Fees and Expenses
6. Burial and Funeral Expenses
Hardship distributions can be very helpful if you need cash to take care of a current financial crisis. But keep in mind the purpose of a 401k plan is not for today, it’s for tomorrow.
We are here to assist you with your planning and investing, so you can focus on living.
If you don’t currently have a plan, we’ll discuss options. If you already have a plan we’ll discuss how it is set-up and how we can improve it!
You can call us directly or visit our office too!
Hagan Newkirk | Plan, Invest, Live
Central Arkansas Corporate Office
6235 Ranch Drive
Little Rock, AR 72223
Phone: (501) 823-4637
Contact Hagan Newkirk
Telephone: (501) 823-4637
Visit our Office:
6325 Ranch Drive
Little Rock, AR 72223