Hardship Distributions from 401(k) Plans

If their employer's 401(k) plan allows for hardship distributions, employees may receive early distributions from their 401(k) account if they have an "immediate and heavy need" due to such expenses as:

• medical expenses
• costs relating to the purchase of a principal residence
• tuition and related educational fees and expenses
• payments necessary to prevent eviction from, or foreclosure on, a principal residence
• burial or funeral expenses
• expenses for the repair of damage to the employee's principal residence

It is important to keep in mind that all 401(k) distributions are subject to federal and state income tax. In addition, most distributions received before age 59 1/2 are subject to a 10% federal tax penalty and a 2.5% California tax penalty. These penalties are in addition to income tax on the distributions. (Exceptions to the penalty are listed in the previous blog post.)

For FAQs about hardship distributions, please visit: http://www.irs.gov/retirement/article/0,,id=162416,00.html