First Person: What We Learned About 401(k) Hardship Withdrawals

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In 2003, my wife and I took a hardship withdrawal from our 401(k). Our particular plan did not permit regular withdrawals or loans, so we had to fill out the proper paperwork and substantiate an "immediate need" for funds. In retrospect, it wasn't the best decision.

A hardship withdrawal from a 401(k) is different from a loan you take out against your retirement plan. The latter does not require a specific reason, for example, and you repay the loan to yourself (plus interest) over a specific period of time. With a hardship withdrawal, however, you do have to prove a need and you don't pay it back.

This means that, when we took a hardship withdrawal from our 401(k), we lost that retirement money. It paid for a slew of medical expenses not covered by insurance, so we certainly benefited, but we'll have to work longer and harder to ensure our financial stability upon retirement.

That was also during a time when my wife and I worked full-time corporate jobs, with all the benefits employees reap. Now that we are both self-employed, our retirement fund is much more difficult to manage.

Nevertheless, there are times when a hardship withdrawal is necessary. Maybe you've been forced to take disability leave from your job and need to cover living expenses. Or perhaps, like us, you've spent some time in the hospital and are drowning in debt from medical services. Whatever the case, a hardship withdrawal can save your neck'"if you qualify.

Immediate and Heavy Financial Burdens

The IRS requires a hardship withdrawal from a 401(k) be granted only when the borrower is presented with an "immediate and heavy financial need" that cannot be satisfied through other means. This is a pretty broad guideline, but there are other criteria to meet as well.

Some examples of an "immediate and heavy need" include imminent eviction from or foreclosure on your home, repairs to damage incurred on your property, medical bills, and tuition costs. However, the expense must be necessary even if the borrower has voluntarily incurred the bill.

For example, let's say an employee purchases a home he cannot afford, and he finds himself facing foreclosure. He would be able to take a hardship distribution from his 401(k) to get caught up on his mortgage, even though he didn't have to buy such an extravagant piece of real estate.

However, if that same employee bought a more modest home and wanted to furnish it with expensive antiques, those expenses will not qualify him for a hardship withdrawal. Most luxuries are excluded unless they relate to your ability to live and work.

Providing Financial Need

The requirements to take a hardship withdrawal from a 401(k) vary. In my cases, I did not have to provide documentation to prove the hardship; I merely had to describe the need and the amount of money I wished to withdraw. Other 401(k) plans require more proof.

It is up to the distributor whether to grant a hardship withdrawal. They might require bills, invoices, bank statements, and other documentation to prove the aforementioned heavy and immediate need, so it is important to talk directly to the provider.

Although we didn't have to substantiate proof of our hardship, we did have to fill out a form describing the hardship and explaining the need for the money. It is important to be honest on this form because, if the provider finds out some of the information is inaccurate, the withdrawal can be denied.

It isn't as difficult as most people think to qualify for a hardship distribution, but it does take work. These withdrawals do not happen as quickly as traditional loans, especially since providers prefer to mail out the necessary forms rather than making them available for download on their web sites.

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