In rare instances, it may be possible to take a hardship distribution from your retirement account. Hardship distributions can only be made if the distribution is because of an immediate and heavy financial need, and is limited only to the amount necessary to satisfy that need. Your retirement plan may – or may not – allow hardship distributions. Plans are not required to do so.
Hardship distributions also come with substantial financial strings attached. You can’t repay a hardship distribution to your retirement plan. In IRAs and similar plans, hardship withdrawals are subject to income taxes and a 10 percent penalty. Your retirement income will also take a hit, not only from the withdrawal, but from the earnings that you’ll forgo.
It’s up to the employer to determine what is covered by “an immediate and heavy financial need.” Consumer purchases – such as a boat or television – generally do not qualify. However a financial need may be immediate and heavy, even if it was reasonably foreseeable or even voluntarily incurred by the employee.
IRS “safe harbor” rules say an employee automatically has an immediate and heavy financial need if the distribution is for:
The distribution must be limited to the amount necessary to satisfy the need, and the employee must not reasonably be able obtain the funds from another source. In determining the need, the employer may rely on the employee’s written statement that it cannot be satisfied from other available resources.
In a 401(k) plan, hardship distributions can only be made from the employee’s contributions and the employer’s portion, not from the plan earnings, however the plan’s rules may differ on employer contributions.