Hardship withdrawals are a form of financial aid available to people younger than 59½ who are facing financial distress but have not yet been able to save extenisvely for retirement. This form of withdrawal allows individuals to access money in retirement accounts like 401(k)s or IRAs without incuring the usual 10% penalty. The withdrawal would still be subject to income tax.

It is important to note that while hardship withdrawals provide a source of cash with some benefits, it can also be difficult to recover from accessing retirement funds early. It will take longer to accumulate retirement savings since the funds taken are not returned, so it is important for people facing hardship to weigh their options carefully.

Not all hardships qualify for a hardship withdrawal so it is important to understand the way in which the Internal Revenue Service (IRS) defines a financial hardship. Depending on the type of account and plan, the IRS will likely look at a number of factors and determine of the withdrawal is due to an “immediate and heavy” financial need. These needs may include:

• Unreimbursed medical expenses

• Costs related to maintaining or preserving one’s primary residence

• Payments necessary to prevent eviction or foreclosure on a primary residence

• Post-secondary education tuition and fees for the next 12 months

• Funeral expenses

• Necessary repairs to a primary residence

If the withdrawal request is related to one of the above needs then it may qualify as a hardship withdrawal. If an individual is seeking a hardship withdrawal, their employer or plan administrator will provide them with the exact details on qualifying and applying.

For individuals weighing their financial options, hardship withdrawals may be a viable way to cover financial needs, but it is important to understand the consequences that come with this type of withdrawal. An alternative to accessing funds early without completely depleting retirement savings is to consider a Substantially Equal Periodic Payment (SEPP) plan. The SEPP offers individuals an alternative to hardship withdrawals where funds can be withdrawn over a set period of time in considerably smaller amounts. The payments are then taxed as income which can be spread over the entire repayment period.

Ultimately, individuals facing financial hardships should carefully evaluate their options. Hardship withdrawals may be an option, but it is important to remember that the funds taken will not be returned and the individual is still subject to income tax. Before making any withdrawals, it is best to assess all possible options to determine which solution is best for individual needs.