If you are under age 59 l/2 and are either "disabled" or have a "hardship," you may be able to withdraw your money. The money you take will be counted as ordinary income for tax purposes. You may have to pay tax penalties.

If your Plan allows distributions upon disability, it is advisable to check your Plan's definition of "disability." It may be defined the same as in the law for Social Security Disability Insurance (SSDI), or the definition may be more generous. With respect to hardships, there are not only rules which define a hardship for 401K purposes, there are also rules about continuing to invest in the plan after the hardship distribution.

A plan will define "disability" with a standard such as defined in the Social Security laws or a standard defined in the plan itself. Either way, your doctor's cooperation is critical.

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.

If you become disabled as defined under the terms of your Plan, your account will become fully vested (belongs to you no matter who contributed it). The wording of the definition for "Disability" varies from plan to plan. It may be the same as it is in the laws relating to Social Security Disability Insurance (SSDI). To learn more, see: SSDI 101.

Any money you withdraw, regardless of your age, will not be subject to an early distribution penalty. However, the money will be counted as "ordinary income" subject to income tax in the year you take it.

If you do not qualify for disability, and want to withdraw funds penalty-free, you might qualify for a hardship withdrawal as described below.

You are allowed to withdraw money from a 401K due to "an immediate and heavy financial need." This is known as a Hardship Withdrawal.

There are specific circumstances which qualify for a Hardship Withdrawal. After you make a Hardship Withdrawal, you can not continue to contribute to a 401K for 6 months following the hardship distribution date.

If you make a hardship withdrawal from your 401K Plan, your contributions to the plan will automatically be suspended for 6 months after the withdrawal.  After the 6 month period, you can resume making contributions to the plan.

NOTE: The annual limit on contributions will apply to the sum of contributions made in the year in which you took the withdrawal, plus those of the year in which you were reinstated in the plan.

Check your Plan to find out if it allows for an early withdrawal due to disability If it does, it will generally include one of the following requirements.

• You must qualify for disability under the Social Security laws such as Social Security Disability Insurance (SSDI). To learn what that means, as well as how to improve your chances of obtaining disability status, see: SSDI: 101.
• The Plan may have its own definition of "disability." For instance, the plan may define disability as your being unable to do your current job (as compared to the more general definition in the Social Security law which relates to being able to do any job for which you are qualified). If a plan includes its own definition of disability, it usually only requires a doctor's written opinion stating that you are disabled. The plan may reserve to the administrator the right to confirm the disability - for instance, through direct contact with your doctor, by requesting a copy of your medical records, or by having a second opinion.

If you have questions about your Plan's definition of "disability," or how to qualify, ask your plan administrator.

The IRS has the right to question whether you are indeed disabled within the Plan's definition. However, as a general matter, the IRS seems to only check to determine if the plan has such an exception, not whether your particular situation fits the definition.

NOTE: Keep in mind that even though the amount of your withdrawal is not subject to penalty for early withdrawal, it is subject to ordinary income tax.

To apply for a withdrawal from a retirement plan because of hardship, consider the following steps:

Step 1: Check your plan to determine whether an early withdrawal due to hardship is permitted.

Step 2: If hardship withdrawals are permitted, the plan will tell you how such withdrawals are defined. They may be limited to specific causes of hardship - such as medical expense or mortgage foreclosure.

Step 3: If you think you can qualify for one of the permitted reasons, ask the plan administrator how that type of hardship is defined. For example, if the reason is medical expense, don't be surprised if you have to present copies of medical bills for a period of time such as XXX months.

The IRS has a right to question whether you are suffering from a "hardship" within the Plan's definition. However, as a general matter the IRS seems to only check to determine if the plan has such an exception, not whether your situation fits the definition.

NOTE: Keep in mind that the amount of your withdrawal due to a "hardship" is subject to a penalty for early withdrawal, as well as being subject to ordinary income tax.