Understanding Hardship Withdrawals from Retirement Plans
What is a Hardship Withdrawal?
A hardship withdrawal is a distribution from a retirement plan, such as a 401(k) or 403(b) plan, that is made due to an immediate and heavy financial need. The IRS has specific criteria that must be met in order for a withdrawal to qualify as a hardship distribution.
IRS Criteria for Hardship Withdrawals
According to the IRS, a hardship withdrawal must be made on account of an immediate and heavy financial need, and the amount withdrawn must be necessary to satisfy the need. The need must be the employee’s own or that of their spouse or dependent.
Certain expenses are deemed to be immediate and heavy, including:
- Medical expenses
- Costs related to the purchase of a principal residence
- Tuition and related educational fees and expenses
- Payments necessary to prevent eviction from or foreclosure on a principal residence
- Burial or funeral expenses
- Certain expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC Section 165
- Expenses and losses incurred by an employee on account of a Federal disaster declaration, provided that the employee’s principal residence or principal place of employment was located in the disaster zone and designated for individual assistance
Consequences of Hardship Withdrawals
Hardship withdrawals are subject to income tax and may also be subject to an additional 10% early withdrawal penalty if the participant is under age 59½. Hardship withdrawals also permanently reduce the employee’s account balance under the plan.
IRS Levy and Hardship Relief
What is an IRS Levy?
An IRS levy is a legal seizure of property to satisfy a tax debt. The IRS can levy wages, bank accounts, and other assets.
Hardship Relief from IRS Levies
If an IRS levy is causing an immediate economic hardship, the levy may be released. An economic hardship occurs when the levy prevents the taxpayer from meeting basic, reasonable living expenses.
To request hardship relief from an IRS levy, the taxpayer should contact the IRS at the telephone number on the levy or correspondence and explain their financial situation. The taxpayer will likely need to provide financial information to the IRS to demonstrate the hardship.
What the IRS Considers a Hardship for Levy Relief
The IRS considers a hardship to exist when the levy prevents the taxpayer from meeting basic, reasonable living expenses. This includes expenses such as:
- Food
- Housing
- Clothing
- Transportation
- Medical care
- Child care
The IRS will also consider the taxpayer’s overall financial situation, including their income, assets, and debts.
The IRS has specific criteria for what it considers a hardship for the purposes of hardship withdrawals from retirement plans and levy relief. Taxpayers who are experiencing a hardship should contact the IRS to discuss their options.
Additional Resources:
IRS Hardship Program Explained
FAQ
What qualifies as an IRS hardship?
What is considered a hardship reason?
What is proof of hardship?
Does the IRS deem a person a financial hardship?
The IRS will not deem a person needing financial hardship if their needs can be met by other means such as liquidation of assets, insurance, or commercial sources. IRS Financial Hardship is granted both to those employed by a corporation or those who are self-employed.
What is a tax hardship?
In simple terms, a hardship refers to a situation where an individual or business is facing significant financial obstacles that prevent them from meeting their tax obligations. The IRS recognizes that life can throw unexpected challenges our way, and it acknowledges that these challenges can impact a taxpayer’s ability to pay their taxes on time.
What is a hardship distribution?
A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.
Does a retirement plan allow hardship distributions?
“A retirement plan may, but is not required to, provide for hardship distributions,” the IRS states. If the plan does allow hardship distributions, it must specify the criteria that define a hardship, such as paying for medical or funeral expenses. Your employer will ask for specific information and possibly documentation of your hardship.