401k Hardship Withdrawal (college)?

[travis304]

Hi folks,

New member here, and having difficulty finding answers to my questions. Long story made short: I'm in my final year of college, recently separated from my wife, with no savings (that she depleted on frivolous purchases shortly after declaring her intentions to separate), and mounting expenses that could become catastrophic as well as ruin my stability and ability to work. I'm debating submitting an e-certified proof of hardship using my college tuition to receive what little I have in my 401k, to help pay my tuition next term. This is because I will then receive a larger refund for my excess student loan amount, which will be paramount to helping me through a myriad of medical / vehicular / legal expenses. Before you begin the "lecture" on hardship withdrawals: I'm 24 years old, currently in the Armed Forces, trying to graduate university, am about to experience the disaster and expense of divorce, with an 18-month old daughter who gets to suffer and who I am trying to support now on my income alone - also throw in some likely expensive vehicle repairs and other expenses, and you can easily see my need for some emergency funding. I fully understand how penalizing and negative a hardship withdrawal is. I don't care how old and wise you are. I don't need to hear it from you. Let's leave it at that. My questions are:

1. What documentation do I / might I need to show, stating that I actually used my hardship withdrawal to pay my tuition, after I receive my withdrawal? I've found plenty of information for other withdrawal types - but not this.
2. Can I still receive a hardship withdrawal, even though I have student loans and a small grant helping pay my tuition?
2a. I ask this because of my aforementioned statement: Paying my tuition "out of pocket" (with this small amount left over in my 401k) will yield a refund from my university that will help with the above issues.
3. Can hardship withdrawals be used for other expenses besides tuition, eviction, funeral expenses or medical expenses?
3a. Is this legal?

V/r
Travis

 

[Zigner]

I'm sorry, but I really don't see a hardship here, rather, I simply see someone who is trying to game the system.

 

[TheGeekess]

Hi folks,

New member here, and having difficulty finding answers to my questions. Long story made short: I'm in my final year of college, recently separated from my wife, with no savings (that she depleted on frivolous purchases shortly after declaring her intentions to separate), and mounting expenses that could become catastrophic as well as ruin my stability and ability to work. I'm debating submitting an e-certified proof of hardship using my college tuition to receive what little I have in my 401k, to help pay my tuition next term. This is because I will then receive a larger refund for my excess student loan amount, which will be paramount to helping me through a myriad of medical / vehicular / legal expenses. Before you begin the "lecture" on hardship withdrawals: I'm 24 years old, currently in the Armed Forces, trying to graduate university, am about to experience the disaster and expense of divorce, with an 18-month old daughter who gets to suffer and who I am trying to support now on my income alone - also throw in some likely expensive vehicle repairs and other expenses, and you can easily see my need for some emergency funding. I fully understand how penalizing and negative a hardship withdrawal is. I don't care how old and wise you are. I don't need to hear it from you. Let's leave it at that. My questions are:

1. What documentation do I / might I need to show, stating that I actually used my hardship withdrawal to pay my tuition, after I receive my withdrawal? I've found plenty of information for other withdrawal types - but not this.
2. Can I still receive a hardship withdrawal, even though I have student loans and a small grant helping pay my tuition?
2a. I ask this because of my aforementioned statement: Paying my tuition "out of pocket" (with this small amount left over in my 401k) will yield a refund from my university that will help with the above issues.
3. Can hardship withdrawals be used for other expenses besides tuition, eviction, funeral expenses or medical expenses?
3a. Is this legal?

V/r
Travis

Whether or not it is considered a 'hardship withdrawal' is dependent on your plan's description per IRS rules.
https://www.irs.gov/Retirement-Plans/Do%E2%80%99s-and-Don%E2%80%99ts-of-Hardship-Distributions

. Under what circumstances can a participant get a hardship distribution from a retirement plan?

A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Thus, 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.

If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
(Reg. §1.401(k)-1(d)(3)(i))

If your 401(k) plan made hardship distributions that didn’t follow the plan language, or if your plan doesn’t have hardship language, find out how you can correct this mistake.

The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.

If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an "unforeseeable emergency."
(Reg. § 1.457-6(c)(2))

https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions

 

[FlyingRon]

You need to talk to whomever is administering the plan. They will tell you what documentation they will require to approve the hardship withdrawal. It matters not if you have additional other sources of financial aid, only that the money you are withdrawing from the plan goes to pay the qualified educational expenses.

THere's no way to SCAM the system. If you don't spend the money as you said you were, or you get refunded for money you withdrew, you must pay the penalty on it.

The things you're discussing avoid the 10% penalty (you still have to pay the tax).

 

[LdiJ]

Hi folks,

New member here, and having difficulty finding answers to my questions. Long story made short: I'm in my final year of college, recently separated from my wife, with no savings (that she depleted on frivolous purchases shortly after declaring her intentions to separate), and mounting expenses that could become catastrophic as well as ruin my stability and ability to work. I'm debating submitting an e-certified proof of hardship using my college tuition to receive what little I have in my 401k, to help pay my tuition next term. This is because I will then receive a larger refund for my excess student loan amount, which will be paramount to helping me through a myriad of medical / vehicular / legal expenses. Before you begin the "lecture" on hardship withdrawals: I'm 24 years old, currently in the Armed Forces, trying to graduate university, am about to experience the disaster and expense of divorce, with an 18-month old daughter who gets to suffer and who I am trying to support now on my income alone - also throw in some likely expensive vehicle repairs and other expenses, and you can easily see my need for some emergency funding. I fully understand how penalizing and negative a hardship withdrawal is. I don't care how old and wise you are. I don't need to hear it from you. Let's leave it at that. My questions are:

1. What documentation do I / might I need to show, stating that I actually used my hardship withdrawal to pay my tuition, after I receive my withdrawal? I've found plenty of information for other withdrawal types - but not this.
2. Can I still receive a hardship withdrawal, even though I have student loans and a small grant helping pay my tuition?
2a. I ask this because of my aforementioned statement: Paying my tuition "out of pocket" (with this small amount left over in my 401k) will yield a refund from my university that will help with the above issues.
3. Can hardship withdrawals be used for other expenses besides tuition, eviction, funeral expenses or medical expenses?
3a. Is this legal?

V/r
Travis

It depends entirely on how your employer's 401k plan has been set up as far as hardship withdrawals are concerned. You need to talk to the plan administrator.

 

[travis304]

You need to talk to whomever is administering the plan. They will tell you what documentation they will require to approve the hardship withdrawal. It matters not if you have additional other sources of financial aid, only that the money you are withdrawing from the plan goes to pay the qualified educational expenses.

THere's no way to SCAM the system. If you don't spend the money as you said you were, or you get refunded for money you withdrew, you must pay the penalty on it.

The things you're discussing avoid the 10% penalty (you still have to pay the tax).

Thank you, Ron, for a punctual and relevant post. I've spoken with Fidelity (they manage the plan). I can provide a copy of my tuition bill for my expenses. They did not state I need to provide anything else.

I understand how stringent the regulations are concerning hardship withdrawals - what documentation will I need for the likely audit? You mention "don't spend the money as you said you were", isn't that illegal?

V/r
Travis

 

[LdiJ]

You need to talk to whomever is administering the plan. They will tell you what documentation they will require to approve the hardship withdrawal. It matters not if you have additional other sources of financial aid, only that the money you are withdrawing from the plan goes to pay the qualified educational expenses.

THere's no way to SCAM the system. If you don't spend the money as you said you were, or you get refunded for money you withdrew, you must pay the penalty on it.

The things you're discussing avoid the 10% penalty (you still have to pay the tax).

There is usually no penalty in a hardship withdrawal because hardship withdrawals generally are loans that must be paid back. Its spending the money on qualified expenses (if its an actual distribution rather than a loan) that allows for an exclusion from the penalty.

 

[travis304]

There is usually no penalty in a hardship withdrawal because hardship withdrawals generally are loans that must be paid back. Its spending the money on qualified expenses (if its an actual distribution rather than a loan) that allows for an exclusion from the penalty.

Under my plan, my withdrawal is not a loan. It is simply a full withdrawal. Even though it is Hardship, the withdrawal is still taxed and penalized 10% under my plan, as well.

 

[cbg]

There is a difference between a loan and a hardship withdrawal. Loans get repaid to the plan. Hardship withdrawals by IRS definition do not.

 

[FlyingRon]

There is usually no penalty in a hardship withdrawal because hardship withdrawals generally are loans that must be paid back. Its spending the money on qualified expenses (if its an actual distribution rather than a loan) that allows for an exclusion from the penalty.

I disagree. A hardship withdrawal is DISTINCT from a loan. The hardship withdrawals aren't generally paid pack, and in fact, they can NOT be, if you were, they would just be treated as a normal contribution for whatever year you made them in.
A 401k loan is a completely different thing. THere's no withdrawal penalty for the loan (provided you pay it within the five year time frame) and you can use the money for anything. It does NOT have to be a hardship.

A loan might be a better solution in some circumstances, but it's not in others. The biggest issue is that it's likely callable if you cease employment at the company whose plan you're in. If that happens it needs to be immediately repaid. If you can't repay it then or you can't repay it even if you continue to work there in the five year schedule, it then become subject to the distribution rules.

Again, your plan needs to advise you. Hardship withdrawals and loans are both discretionary on the plans part.

In this case I suspect the poster has either left the employ or is considering it. It's better for things like paying for part of your house purchase if you have a good job you intend to stick with.
You pay a market interest rate but essentially, you're paying it to yourself. Given how poor bonds are paying, it's actually probably pretty good these days.

 

[FlyingRon]

Under my plan, my withdrawal is not a loan. It is simply a full withdrawal. Even though it is Hardship, the withdrawal is still taxed and penalized 10% under my plan, as well.

A 401k distribution (hardship or normal) is ALWAYS taxed and for early distributions will always take a certain amount of withholding (note that it may not be your entire tax liability). The 10% PENALTY (this is different from the income tax due) should be waived for an approved hardship case.

 

[travis304]

A 401k distribution (hardship or normal) is ALWAYS taxed and for early distributions will always take a certain amount of withholding (note that it may not be your entire tax liability). The 10% PENALTY (this is different from the income tax due) should be waived for an approved hardship case.

Thanks for clarifying. I am not planning to leave my employer. This is simply an option I am researching to help pay for the myriad of expenses I've encountered in recent months. I've alraedy spoken with my plan's governing body, and I do qualify for a hardship withdrawal to pay tuition expenses. I've heard of others lying / creating false documentation / fabricating stories to falsely certify they need a hardship withdrawal. This is not my intention. I intend to use this money to pay for tuition expenses. As a legitimate Hardship withdrawal, can these funds be used for other expenses? Or must they only specifically be used for tuition?

 

[eerelations]

I intend to use this money to pay for tuition expenses. As a legitimate Hardship withdrawal, can these funds be used for other expenses? Or must they only specifically be used for tuition?

If you're intending to spend the money on tuition, why does it matter whether or not you're allowed to spend it on other things instead?

 

[travis304]

If you're intending to spend the money on tuition, why does it matter whether or not you're allowed to spend it on other things instead?

Because right now I am also seeking financial assistance options through the military, but my tuition still needs to be paid, and I can't make a good faith statement claiming that I'll have that assistance now. If I am able to secure TA for my tuition expenses, the funds withdrawn under my hardship distribution would no longer apply (my university refunds out-of-pocket payments once financial aid is received). And on that note, can withdrawn funds be placed back into a 401k?

 

[davew128]

If you don't spend the money as you said you were, or you get refunded for money you withdrew, you must pay the penalty on it.

The things you're discussing avoid the 10% penalty (you still have to pay the tax).

Correction. None of the items listed except possibly medical expenses avoid the 10% penalty on a qualified plan distribution.