If you contribute to a company 401(k) or similar employer retirement plan, generally you cannot withdraw money from your account before you reach age 59 ½.
Some plans let you withdraw money outright for certain financial and medical hardships before you reach that age, although they are not required to do so.
Unfortunately, you could pay a big price for withdrawing your funds:
- You will owe income tax on the amount you withdraw, just as you would had you withdrawn it in retirement.
- And, if you are under age 59 1/2, you will probably have to pay a 10% early withdrawal penalty that's included as part of your income taxes.
The amount of the distribution is reported to you and to the IRS on a Form 1099 R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
To enter the information in TurboTax, go to the Federal Taxes tab, Wages & Income, then Retirement Plans and Social Security.
Don’t confuse hardship distributions with 401(k) loans, which must be repaid in five years.
Early withdrawal taxes could be imposed
Getting a hardship distribution means that you are allowed to withdraw the money before age 59 ½. It does NOT mean that taxes are waived.
The IRS considers your withdrawal an "early distribution" and imposes income taxes.
It can also assess a 10% early withdrawal tax, except in certain situations.
Which hardships qualify?
You can take a 401(k) hardship distribution if your plan allows it and you have what the IRS calls “an immediate and heavy financial need.”
Depending on your plan’s rules, the following needs could qualify:
- Payment needed to prevent eviction from, or foreclosure on, your principal residence.
- Certain medical expenses
- Burial or funeral expenses
- Cost of repairing damage to your principal residence
- Cost of purchasing your principal residence
- Tuition and related educational fees and expenses
Keep in mind
Your hardship can be considered immediate and heavy even if it was foreseeable or voluntary.
But, your need is NOT regarded as necessary if you or family members have other financial resources.
You cannot repay the distribution from the plan and in most cases you are not permitted to contribute to the plan for six months after the withdrawal.
How much can you withdraw?
Your hardship distribution can not exceed the amount you need, but it can include the money you need to pay any taxes and any penalties that result from the distribution.
Generally, the withdrawal can’t be greater than the contributions you have made to the plan and can’t include the account’s earnings.
However, the withdrawal can include regular matching contributions and profit-sharing contributions, if your plan allows.
What about retirement plans other than 401(k)s?
Similar hardship withdrawals can be made from 403 (b) and 457(b) retirement savings plans, but the rules are determined by each individual employer plan.
These rules do NOT apply to IRAs.
Exceptions to 10% penalty
If you take a hardship withdrawal from your 401(k) plan before age 59 1/2, generally you must pay a 10% additional tax along with income taxes, except in these cases:
- You have unreimbursed medical expenses that are more than 7.5% of your adjust gross income.
- You, but not a family member, are deemed totally and permanently disabled.
- You are a beneficiary of a deceased person's retirement plan.
- The distribution is due to an IRS levy.
- You took the distribution as a military reservist called to active duty.
- You are receiving distributions in the form of an annuity.
- You are receiving a distribution to reduce excess contributions to a 401(k).
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