401k Hardship Withdraw

[Rahille2]

If I withdraw my 401k under hardship and use it to pay off debt on cards, will I get in trouble for using for something other than a reason they list?

[VolvoGirl]

Who is they?  The 401K plan?  You have to ask them.  But for taxes it will be taxable and a 10% Early Withdrawal Penalty if you are under 59 1/2.  There's only a few exceptions to the penalty.  

401K penalty exceptions

https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/exceptions-penalty-e...

[Critter-3]

Ok ... let you in on  a secret ... the 401K plan administrator just needs to justify the distribution and "hardship" is one of the allowed boxes on the form.  They NEVER check to see what you actually used the money for  HOWEVER ALL  distributions are subject to fed/state taxes  AND a 10% penalty if you don't have an exception for the penalty.

[fanfare]

wanting to pay down your credit cards is not considered a hardship for 401k purposes.

but 10% penalty is probably less than the interest you are paying on the credit card aver a long time.

@Rahille2 

[fanfare]

From NY Times:

Two large retirement plan administrators, Fidelity and Vanguard, have observed increases in hardship withdrawals, which may be taken only if there is “an immediate and heavy financial need,” according to the Internal Revenue Service. Fidelity found that 2.4 percent of 22 million people with retirement accounts in its system took hardship withdrawals in the final quarter of 2022, up half a percentage point from a year earlier. A similar analysis by Vanguard found that 2.8 percent of five million people with retirement accounts made a hardship withdrawal last year, up from 2.1 percent a year earlier.

[fanfare]

IRS says:

 

Before making hardship distributions:

1. Review the terms of the plan, including:

• whether the plan allows hardship distributions;
• the procedures the employee must follow to request a hardship distribution;
• the plan’s definition of a hardship; and
• any limits on the amount and type of funds that can be distributed for a hardship from an employee’s accounts.

1. Obtain a statement or verification of the employee’s hardship as required by the plan’s terms.
    
2. Determine that the exact nature of the employee’s hardship qualifies for a distribution under the plan’s definition of a hardship.
    
3. Document, as may be required by the plan, that the employee has exhausted any loans or distributions, other than hardship distributions, that are available from the plan or any other plan of the employer in which the employee participates.

[Opus 17]

The plan sets the rules on hardship withdrawals, and it is up to the plan to enforce those rules.  You won't get in trouble if you use the funds for something other than you claim.  Potentially the plan could get in trouble if the IRS determines they don't have proper internal controls. 

[Rahille2]

Okay so the IRS or my plan (Voya Financial) can't do anything if I take a hardship withdrawal given I don't have an actual hardship?

[Opus 17]

@Rahille2 

You probably must sign some kind of certification that you meet the hardship conditions.  We can’t give legal advice on what might happen to you if you knowingly sign a false verification.  

There are no IRS penalties on your tax return if you sign a false hardship certification.  But your company might not be very happy if you put their entire retirement scheme at risk.