401k Plans: If You Are Under Age 59 l/2 And Become Disabled Or Have A Hardship

Your employer has the option to allow hardship distributions from its plan. If the Plan does allow hardship distributions, your employer has the choice of determining the hardship or using certain rules, known as "safe-harbor" rules, which automatically qualify a withdrawal for hardship.

The following immediate and financial needs for funds will automatically qualify for a hardship withdrawal. The funds you withdraw are subject to income tax in the year in which you withdraw them. If you are under age 59 1/2, a penalty is also a penalty is also due.

• Medical expenses
  • Medical expenses in excess of the threshold for deductibility may be tax deductible. (The threshold for the itemized deduction for unreimbursed medical expenses is 10% of the taxpayer’s Adjusted Gross Income (AGI). However, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the close of the tax year, the threshold is 7.5% of AGI. In 2017 the 10% threshold will apply to all taxpayers.) Since, by definition, you exceed the threshold over which medical expenses can be deducted, the tax savings from the medical expense deductions may help offset the additional taxes due from the distribution.
• Purchase of a primary residence:
  • As with an IRA account, you can withdraw up to $10,000 without penalty for the purchase of a primary residence - the place where you will live most of the time, as opposed to a vacation or second home. A withdrawal to purchase a primary residence is allowed only once in a lifetime. (To learn more about IRAs, see: IRA.)
• To avoiding eviction from your home
  • You will automatically be granted a hardship withdrawal if the money is used to avoid eviction. However, a hardship withdrawal made for this reason does not avoid the 10% premature distribution penalty.
• Payment of one-year's college tuition and expenses

The hardship rules allow you to withdraw an amount equal to one-year's college tuition and expenses.

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