hardship withdrawal

[Guest cusinit66]

I recently attempted to do a full-amount hardship withdrawal from my 401K (which I undoubtedly qualify for - putting myself through school and attempting to buy a home.) I have been told that I can not withdraw but instead have to take out a loan and that I am eligible for only 50%.

But it gets better. If I elect to do this, not only does it incur an additional payment for me (to repay the loan), it also prevents me from accessing the other 50% should the need arise because it is used as collateral on the 50% loan.

What is wrong with this picture? Doesn't hardship truly mean what it implies? Can anyone address whether or not I can actually withdraw the full amount and if so, how?? My pension fund company is being extremely difficult and insists that there is only one choice - the loan. Then I ask you, if that is the case, what is the purpose of the hardship option??

Thank you for any and all help that anyone can offer.

[Tom Poje]

this all depends on what the document says. you should have a copy of the SPD (Summary of Plan Description) will provide the basic info.

1. document does not have to allow for hardships, so it might be impossible to get hardships anyway.

2. even if document allows for hardships, you can withdraw deferrals only, no gains on the money.

3. since you indicated loans were possible, the law requires taht you exhaust every means to obtain money before taking a hardship - that would include loans.

so, based on the facts describe, it sounds like you would have to take the loan first, and the maximum is generally set at 50% of the vested balance, because, yes indeed the other 50% is considered collateral on the loan. without knowing the exact loan provisions I can't say more, but that is generally the case. (If one could argue the loan would be a bad risk I suppose it could be denied and then if the document allowed hardships you could get around it)

based on what you indicated it sounds like there is no other money in the plan (match or profit sharing) or that loans are available on deferral money only. otherwise you could get the loan on that money and then a hardship on the deferral.

sorry, wish I could be more helpful, but that is the law. remember the whole idea of these plans is to have money for retirement, not to operate like a credit union. It sounds like you have someone that is administrating the plan as it should, which is really good news.

HOWEVER, ALL THAT BEING SAID, the regulations recently passed (Dec 2004) clearly state that you can't be put in a counterproductive position. e.g. by taking a plan loan you wont be able to obtain an additional loan from the bank for the purchase of a house, etc. this is found in Treas Reg 1.401(k)-1(d)(3)(iv)(D). These particular regulations become effective 1/1/06. You might be able to argue your case on these grounds, though the plan wouldn't have to follow them until the beginning of next year.

good luck.

[wmyer]

I assume you are still working for the employer with whom you have the 401(k), and that you are not 59 1/2 -- if you are no longer working for the employer or are over age 59 1/2, you could have another distributable event. Recall also that harship distributions are subject to federal income tax and possibly also state income tax and a 10% penalty.

[JanetM]

As Tom said, check the SPD, maybe you could take the minimum loan and then qualify for the hardship.