Hardship distribution vs. in-service withdrawal.

[Guest Theresa]

What are the advantages of taking an in-service withdrawal as opposed to a hardship distribution from a 401(k) Plan? Also with a hardship distribution, what amount is the participant eligible to withdraw? Likewise with an in-service withdrawal, what amount can be withdrawn?

[Guest]

a hardship from deferral account can only be deferral $, and can not include gains earned on that money. (except for pre 1989 gains)

there does not have to be 20% withholding on deferral $.

remember to follow terms of the document, you are suppose to have an actual hardship, this is different than taking an in service withdrawal - no reason is required.

[M R Bernardin]

A non-hardship, in-service withdrawal can generally only be taken after age 59-1/2, if the assets are deferral monies. If the assets are non-deferral monies, they can be withdrawn at any time upon satisfaction of an objective withdrawal condition stated in the plan (e.g., attainment of a specified age, completion of a specified number of years of service, etc.) These non-hardship withdrawals would be eligible for rollover, and would also be subject to mandatory 20% income tax withholding.

Before a hardship distribution can be taken, you must certify that your hardship exists, and you must generally take all non-taxable loans, and all other in-service withdrawals which are available to you, before you can take the hardship withdrawal. (These rules may not apply in a plan following a "non-safe-harbor" definition of hardship.) Hardship withdrawals paid from deferral money is not eligible for rollover treatment, unless another distributable event has occurred (e.g., the participant has turned 59-1/2, terminated from service, become disabled, etc.) This means that portion paid from deferral money is subject to 10% income tax withholding, but the participant may elect not to have taxes withheld. The portion of the hardship withdrawal paid from non-deferral money is still eligible for rollover and still subject to mandatory 20% withholding.

The amount that is available for a hardship withdrawal will be dictated by the terms of the plan. To the extent only deferral money is available for hardship withdrawal, the amount withdrawn cannot exceed the amount needed to satisfy the financial need, including any taxes that will be due, nor can it exceed the sum of participant's pre-tax contributions, earnings on those pre-tax contributions credited (roughly) before 1989, and any QNECs and QMACs made before (roughly) 1989, less any prior hardship withdrawals.

To the extent the withdrawal includes non-deferral money, the amounts available truly will be dictated by the terms of the plan.