401k Hardship Withdrawal (college)?

[davew128]

The 10% PENALTY (this is different from the income tax due) should be waived for an approved hardship case.

Again, this is not true. There is no hardship exception for the 10% penalty. https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Tax-on-Early-Distributions

 

[travis304]

I'm reading a lot of back and forth on something that isn't really relevant here, folks. Can any of you answer any of my questions? Or is this forum going to fall into the stereotypical he said she said I'm right you're wrong ideal?

 

[cbg]

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. A copy of the tuition bill or a letter from the registrar. You will need to ask your plan administrator what they will find acceptable.

2. Can I still receive a hardship withdrawal, even though I have student loans and a small grant helping pay my tuition? That is a question for you to ask your plan administrator. However, unless you are in your last year, taking a 401k withdrawal can reduce future financial aid. That's something you'll want to consider as well.

3. Can hardship withdrawals be used for other expenses besides tuition, eviction, funeral expenses or medical expenses? Absolutely not. The IRS only allows hardship withdrawals for six reasons; you've listed four, the others are the purchase of your primary home and in SOME cases, repairs to your primary home. There are no other reasons whatsoever and you will need to provide documentary proof for each one. You also cannot take out more than the amount needed to pay the bill in question, grossed up for taxes if desired.

3a. Is this legal? Is what legal?

You don't mention if you've investigated a loan rather than a hardship withdrawal. Some employers (mine is one of them) will not permit you to take a hardship withdrawal if you have a 401(k) loan option availab.e

 

[travis304]

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. A copy of the tuition bill or a letter from the registrar. You will need to ask your plan administrator what they will find acceptable.

2. Can I still receive a hardship withdrawal, even though I have student loans and a small grant helping pay my tuition? That is a question for you to ask your plan administrator. However, unless you are in your last year, taking a 401k withdrawal can reduce future financial aid. That's something you'll want to consider as well.

3. Can hardship withdrawals be used for other expenses besides tuition, eviction, funeral expenses or medical expenses? Absolutely not. The IRS only allows hardship withdrawals for six reasons; you've listed four, the others are the purchase of your primary home and in SOME cases, repairs to your primary home. There are no other reasons whatsoever and you will need to provide documentary proof for each one. You also cannot take out more than the amount needed to pay the bill in question, grossed up for taxes if desired.

3a. Is this legal? Is what legal?

You don't mention if you've investigated a loan rather than a hardship withdrawal. Some employers (mine is one of them) will not permit you to take a hardship withdrawal if you have a 401(k) loan option availab.e

Thank you cbg. I have already had to exhaust my loan option, and am in the process of paying it back. So my only other option is the hardship withdrawal. "Is this legal?" is my referral to the use of a withdrawal for other expenses. I've seen / heard of folks who make a legitimate hardship withdrawal, and due to whatever circumstances, the use of that withdrawal or need for it falls away (a home deal failing, tuition being covered when it was not going to be). I've seen / heard these same people then using their withdrawal for other expenses. What would you do in this instance? Can that money be re-deposited to the 401k? Is there a grace period for returning your withdrawal? Or are you just kind of "screwed" in those instances? I don't want to venture into an illegal activity with my withdrawal - but if you've read my posts, this is a legitimate withdrawal that I need now, but might not actually be able to use as intended later - for my tuition.

 

[eerelations]

Then you give it back. Simple.

 

[FlyingRon]

Again, this is not true. There is no hardship exception for the 10% penalty. https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Tax-on-Early-Distributions

OK, we are both wrong. In a 401k, there is no provision for avoiding the 10% penalty for education or buying a house (these do exist for IRAs), but they do exist for the excess medical expenses. disability, and for certain military.

The table you lined is very nice.

 

[travis304]

OK, we are both wrong. In a 401k, there is no provision for avoiding the 10% penalty for education or buying a house (these do exist for IRAs), but they do exist for the excess medical expenses. disability, and for certain military.

The table you lined is very nice.

I spoke with Fidelity and they stated I can make a hardship withdrawal. I referenced my situation with my tuition. They only stated that if the IRS audits my withdrawal, and I ended up not using the funds because I received financial aid, they're not sure what the result would be. It's very frustrating. MY hardship withdrawal with Fidelity automatically takes all taxes and penalties, regardless. If I paid all the taxes and followed the rules, wouldn't that suffice? I need to figure out whether I'll be able to have this option to pay my tuition, without getting in trouble.

V/r
Travis

 

[LdiJ]

I spoke with Fidelity and they stated I can make a hardship withdrawal. I referenced my situation with my tuition. They only stated that if the IRS audits my withdrawal, and I ended up not using the funds because I received financial aid, they're not sure what the result would be. It's very frustrating. MY hardship withdrawal with Fidelity automatically takes all taxes and penalties, regardless. If I paid all the taxes and followed the rules, wouldn't that suffice? I need to figure out whether I'll be able to have this option to pay my tuition, without getting in trouble.

V/r
Travis

Please note that Fidelity will NOT take out all taxes and penalties, because Fidelity has no way of knowing what your marginal tax rate is. All that they will do is withhold based on information provided by you, which may or may not be enough to cover all of the tax.

Also, the IRS will NOT audit your return due to a 401k distribution if its reported on your return. The IRS might audit if you attempted to claim a penalty exclusion for that distribution.

You are getting confused between your employer plan rules and the IRS rules. They are two separate things. The IRS is not going to audit your withdrawal. The IRS might audit your tax return if you make a mistake on it, but they are not going to audit your withdrawal.

 

[travis304]

Please note that Fidelity will NOT take out all taxes and penalties, because Fidelity has no way of knowing what your marginal tax rate is. All that they will do is withhold based on information provided by you, which may or may not be enough to cover all of the tax.

Also, the IRS will NOT audit your return due to a 401k distribution if its reported on your return. The IRS might audit if you attempted to claim a penalty exclusion for that distribution.

You are getting confused between your employer plan rules and the IRS rules. They are two separate things. The IRS is not going to audit your withdrawal. The IRS might audit your tax return if you make a mistake on it, but they are not going to audit your withdrawal.

Thanks for clarifying. Fidelity stated the plan rules simply follow the IRS rules. I even tried calling the IRS, it's impossible to speak with anybody there. I still don't know what the ramifications will be if I end up not needing my withdrawal for tuition, since it cannot be returned (Fidelity stated so)... the rules aren't even clear regarding whether I qualify because I also use student loans (which I'd rather stop using and piling up). On top of that, I also have over $1,000 in medical expenses, which they stated is another quantifiable reason for a hardship withdrawal. Although these medical bills are in collections, so that just makes it even more confusing. I really wish the IRS provided more info and guidance on this.

 

[LdiJ]

Thanks for clarifying. Fidelity stated the plan rules simply follow the IRS rules. I even tried calling the IRS, it's impossible to speak with anybody there. I still don't know what the ramifications will be if I end up not needing my withdrawal for tuition, since it cannot be returned (Fidelity stated so)... the rules aren't even clear regarding whether I qualify because I also use student loans (which I'd rather stop using and piling up). On top of that, I also have over $1,000 in medical expenses, which they stated is another quantifiable reason for a hardship withdrawal. Although these medical bills are in collections, so that just makes it even more confusing. I really wish the IRS provided more info and guidance on this.

You are really over worrying the situation. If Fidelity allows you to make the withdrawal then all is good.

 

[travis304]

You are really over worrying the situation. If Fidelity allows you to make the withdrawal then all is good.

Right, I may be... My only concern is that they basically allow hardship withdrawals through "self-certification" e.g., it sounds like they don't actually review the application before approving it. I've just heard stories of employees / employers getting burned by hardship withdrawals because the IRS deemed them not sufficient / valid, etc. I'm also still worried that I would be penalized or punished if I end up not requiring the use of my withdrawal... in essence it would look like I took the withdrawal for no valid reason. Then I don't know what would happen (whether my employer / our plan would be penalized, I would be punished by my employer or the IRS, etc)

 

[LdiJ]

Right, I may be... My only concern is that they basically allow hardship withdrawals through "self-certification" e.g., it sounds like they don't actually review the application before approving it. I've just heard stories of employees / employers getting burned by hardship withdrawals because the IRS deemed them not sufficient / valid, etc. I'm also still worried that I would be penalized or punished if I end up not requiring the use of my withdrawal... in essence it would look like I took the withdrawal for no valid reason. Then I don't know what would happen (whether my employer / our plan would be penalized, I would be punished by my employer or the IRS, etc)

If you are that worried about it then do not do it.

 

[cbg]

*attempts not to bang head against wall

*takes deep breath.

You are REALLY overthinking this. Please lose the words, "I've heard stories of...." from your vocabulary. They are getting you into trouble. First off, these "stories" are often exaggerated or downright untrue, and secondly the ones that really do have such problems represent only a very small fraction of the withdrawals that go through successfully.

I am one of the people who initially reviews the hardship withdrawal requests when they are submitted under my employer's plan, and Fidelity is one of our vendors. So yes, I do know what I am talking about. In case you were wondering.

There is no question that it is legal to take a hardship withdrawal for tuition purposes. That's step one.

Step two is, I can promise you that someone is going to review your application. Fidelity is not my favorite investment option but they are reputable and are not in the habit of just sloughing things off.

Step three is, if you really think there is enough of a chance that another source of funds will magically appear after you've already taken the withdrawal, that you're tying yourself into knots about what you would then do with the funds, then don't take the withdrawal. It really is that simple. No one is holding a gun to your head.

 

[FlyingRon]

I don't know how they are on hardship withdrawals, but I had an employee take a 401k loan out and Fidelity was pretty reasonable to deal with.

 

[travis304]

*attempts not to bang head against wall

*takes deep breath.

You are REALLY overthinking this. Please lose the words, "I've heard stories of...." from your vocabulary. They are getting you into trouble. First off, these "stories" are often exaggerated or downright untrue, and secondly the ones that really do have such problems represent only a very small fraction of the withdrawals that go through successfully.

I am one of the people who initially reviews the hardship withdrawal requests when they are submitted under my employer's plan, and Fidelity is one of our vendors. So yes, I do know what I am talking about. In case you were wondering.

There is no question that it is legal to take a hardship withdrawal for tuition purposes. That's step one.

Step two is, I can promise you that someone is going to review your application. Fidelity is not my favorite investment option but they are reputable and are not in the habit of just sloughing things off.

Step three is, if you really think there is enough of a chance that another source of funds will magically appear after you've already taken the withdrawal, that you're tying yourself into knots about what you would then do with the funds, then don't take the withdrawal. It really is that simple. No one is holding a gun to your head.

I'm sorry if I'm sounding overly critical or analytical of this whole process. I just find it a little bit (actually, really) ridiculous that I'm the one who has to somehow make the determination that my hardship withdrawal would be valid / legal. According to Fidelity, my rental payments for my apartment and "room and board" expenses suffice since I'm a student, even though I'm an online student. I finally found someone at my company who can be the final determiner on the ramifications of this whole process... hoping to hear from her shortly. Thanks for you input, you've been the only one that is actually answering my questions / concerns.