retirement

401(k) may not offer hardship withdrawal

Don Taylorq_v2.gifDear Dr. Don,
I have $100,000 in credit card debt on a $70,000 income. I have talked with two different credit counselors who said bankruptcy is my only option. I think I can get it under control by taking money from my 401(k). But, my plan doesn't allow loans. Do I qualify for a hardship withdrawal?
-- Ron Run-up

a_v2.gifDear Ron,
If your plan doesn't allow loans, it's also possible your plan doesn't allow hardship withdrawals. A 401(k) plan isn't required to allow them. The plan sponsor would be able to tell you if hardship withdrawals are available and under what circumstances the plan allows for hardship withdrawals.

The Internal Revenue Service article "Retirement Topics - Hardship Distributions" provides guidance on the situations where a 401(k) plan can classify an early distribution as a hardship distribution as excerpted below:

IRS rules provide "safe harbors" for determining if a hardship distribution is on account of an "immediate and heavy financial need":

  • Expenses for medical care previously incurred by the employee, the employee's spouse, dependents or beneficiary or is now necessary for these persons to obtain medical care;
  • Costs directly related to the purchase of an employee's principal residence (excluding mortgage payments);
  • Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee, or the employee's spouse, children, dependents or beneficiary of the employee;
  • Payments necessary to prevent the eviction of the employee from the employee's principal residence or mortgage foreclosure;
  • Funeral expenses for the employee, the employee's spouse, children, dependents, or beneficiary of the employee; or
  • Certain damage repair expenses for the employee's principal residence.

Your hardship does not appear to fall within the "safe harbor" provisions outlined by the IRS. To find out if you qualify for a hardship distribution would require a review of the plan documents and some professional tax advice.

It's also quite possible that the credit counselors were providing you with sound advice when they recommended bankruptcy. The ability to protect retirement and other assets in bankruptcy is something to discuss with a bankruptcy attorney.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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