401k Hardship Withdrawals - An OverviewWritten by Rick Meigs, Publisher, 401khelpcenter.com
Like loans, hardship withdrawals are allowed by law, but your employer is not required to provide for them in your plan. Again, most companies do, but some don’t. The cost of administering such a program can be prohibitive for many small companies. Check with your Human Resources department if you’re not sure if your plan allows hardship withdrawal. Like loans, your employer must adhere to some very strict and detailed guidelines. The IRS code that governs 401k plans provides for hardship withdrawals only if: (1) withdrawal is due to an immediate and heavy financial need; (2) withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet need); (3) withdrawal must not exceed amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under 401k plan; and (5) you can’t contribute to 401k plan for six months following withdrawal.
| | 401k Plan Loans - An OverviewWritten by Rick Meigs, Publisher, 401khelpcenter.com
Allowing loans within a 401k plan is allowed by law, but an employer is not required to do so. Many small business just can't afford high cost of adding this feature to their plan. Even so, loans are a feature of most 401k plans. If offered, an employer must adhere to some very strict and detailed guidelines on making and administering them. The statutes governing plan loans place no specific restrictions on what need or use will be for loans, except that loans must be reasonably available to all participants. But an employer can restrict reasons for loans. Many only allow them for following reasons: (1) to pay education expenses for yourself, spouse, or child; (2) to prevent eviction from your home; (3) to pay un-reimbursed medical expenses; or (4) to buy a first-time residence. The loan must be paid back over five years, although this can be extended for a home purchase. Usually participant is allowed to borrow up to 50% of their vested account balance to a maximum of $50,000 (set by law). Because of cost, many plans will also set a minimum amount and restrict number of loans any participant may have outstanding at any one time. Loan payments are generally be deducted from payroll checks and, if participant is married, they may need their spouse's to consent to loan. Funds obtains from a loan are not subject to income tax or 10% early withdrawal penalty. If participant should terminate employment, often any unpaid loan will be distributed to them as income. The amount will then be subject to income tax and may also be subject to 10% withdrawal penalty. A loan can't be rollover into an IRA.
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