Investing in the future is always a great idea, and this is why we bother with things like pensions. If we have spare cash today then the wisest thing to do is put this by for later. When we get older we will likely have far less potential for making money so we have to make provisions for this now. This is why most of us will regularly put money into our pension funds. But what happens if we hit a bad patch now? Will we be able to get this money back that we have put aside for our retirement? Well this is where the hardship withdrawal comes into play. It is an option with some 401K plans and it is a way to get to our money early if life gets too rough financially. The companies that manage these plans add the hardship withdrawal element as a way to encourage people to choose them. This is because we are more likely to put money aside for our future if we know that we can get to it in an emergency.
So what is a Hardship Withdrawal?
The option to make a hardship withdrawal is not available with every 401k plan. There are also usually restrictions as to the circumstances you will be able to do this. If you just want a bit of cash to go on holiday with or to buy a car it is unlikely that the withdrawal will be permissible. Therefore you will need to check with your plan to see under what conditions you can make such a withdrawal. You are likely to find that the rules governing such early withdrawals are quite strict. The rules governing this type of transaction are usually referred to as safe harbor rules; it means that you need to meet specific criteria to qualify.
Safe Harbor Rules
The usual safe harbor rules that apply to hardship withdrawals include the following:
- If you or a dependent becomes sick and you are unable to pay medical expenses then this may mean that you qualify for a withdrawal under the safe harbor rules
- If you are about to be evicted from your home because of non-payment of rent or mortgage then this too could qualify you for a withdrawal.
- Funeral expenses are another possible justification
- If there has been a natural disaster and your home has been damaged then this too would be a good reason
- If you need money to pay for secondary education for one of your dependents then you may qualify for a hardship withdrawal
If you do manage to get a hardship withdrawal you will not be allowed to contribute to the plan again for six months after the withdrawal. This can be problematic because of the long term consequences and will put people off making such a withdrawal. The 401k companies introduce the six month rule because of its effectiveness in discouraging people from making such withdrawals.