The Internal Revenue Service (IRS) allows 401k investors to take out 401k hardship withdrawals in the form of loans only if these 6 criteria are met:
i) the withdrawal is due to an immediate and important financial need
ii) the withdrawal must be necessary to satisfy that need
iii) You have no other way to fulfill that need or no other sources of money
iv) the withdrawal should not exceed the total amount needed by you
v) You cannot contribute to your 401k plan for up to 6 months after your withdrawal date
vi) You must have first received all non-taxable distributions or loans available under your 401k
401k Hardship withdrawals are permitted by some large companies, but due to the high costs of administering them, they may not be readily available in smaller companies. Check with your Human Resources department to see if 401k hardship withdrawals are permitted in your 401k program.
The following are reasons acceptable by the IRS for a hardship withdrawal
i) Repairs of primary residences
ii) Funeral expenses
iii) Payments necessary to prevent you from being forced out of your home
iv) Home foreclosures
v) Payments of college tuition & other educational costs such as room & board, transportation, food, etc.
vi) Purchase of principal residence
vii) Unexpected or un-reimbursed medical expenses
401k hardship withdrawals are subject to a 10% early withdrawal penalty as well as income taxes due. For example if you withdraw $10,000 as hardship withdrawal, you will owe $1000 in penalty, as well as be taxed on the $9000. There are some hardship withdrawals however that are not subject to the 10% penalty, they are:
i) You stop working, get laid off, quit or retire in the year you turn 55 or after
ii) Court orders you to give money to a divorced spouse or dependent
iii) Unexpected medical debts that exceed 7.5% of your Adjusted Gross Income
iv) Permanent disabilities
v) You stop working and begin taking regular payments based on a schedule that will make equal payments for the rest of your expected life; this must last for 5 years or until you turn 59 and 1/2, whichever is longer.