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Hardship Withdrawal from Roth IRA possible?

Hi,

 

I am retired now, and over course of about 20 years I contributed to a Roth IRA while on active duty military. It wasn't an employer plan, it was just an IRA that I opened myself, contributed to. During that time I tried to earn income through self employment, but never got that off the ground. Not sure if that provides any sort of angle.

 

Is there any way for me to claim a hardship withdrawal from my Roth IRA? I was in a situation where my only available funds were in my Roth IRA.

 

The withdrawal was for primary home purchase, and the $10,000 deduction I already claimed for first time home purchase, but the taxable amount on the distribution is quite significant, and am trying to figure out how this hardship distribution could work in my case, as my tax and penalty is insanely high.

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I see this on IRS site

 

Although not required, a retirement plan may allow participants to receive hardship distributions. A distribution from a participant’s elective deferral account can only be made if the distribution is both:

  • Due to an immediate and heavy financial need.
  • Limited to the amount necessary to satisfy that financial need.

Immediate and heavy financial need

The employer determines a participant has an immediate and heavy financial need based on the plan terms and all relevant facts and circumstances.

  • Consumer purchases (such as a boat or television) are generally not considered an immediate and heavy financial need.
  • A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.

A distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if all of the following requirements are met:

  • The distribution isn't greater than the amount of the immediate and heavy financial need, including the amounts necessary to pay any taxes resulting from the distribution.
  • The employee has obtained all other currently available distributions (including distribution of ESOP dividends under section 404(k), but not hardship distributions) and nontaxable (at the time of the loan) plan loans, including all other plans maintained by the employer.
  • The employee isn't allowed to make elective deferrals to the plan for at least six months after the hardship distribution.

Safe Harbor Distributions

  • Effective Feb. 23, 2017, 401(k) plans may elect to use the "Summary substantiation method" for the six types of hardship distributions below. See Internal Revenue Manual (IRM) Section 4.72.2.7.4.1 (09-05-2017), and Exhibit 4.72.2-2, Attachment One Hardship Substantiation Information and Notifications for Summary of Source Documents.
  • Effective March 7, 2017, 403(b) plans may elect to use the "Summary substantiation method" for the six types of hardship distributions below. See IRM Section 4.72.13.15.4.1.1 (08-11-2017).

Under a “safe harbor” in IRS regulations, an employee is automatically considered to have an immediate and heavy financial need if the distribution is for any of these:

  • Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.
  • Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
  • Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary.
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
  • Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
  • Certain expenses to repair damage to the employee’s principal residence.

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Is there really no way for me to have additional consideration for a heavy financial need that put me in the situation?

 

thanks

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3 Replies
RaifH
Expert Alumni

Hardship Withdrawal from Roth IRA possible?

Before addressing the hardship exemption, can you explain why your Roth IRA withdrawal is taxable at all? If you are over the age of 59 1/2, none of it should be taxable. Even if you are not yet "retirement age," the distributions up to your prior contributions over the 20 years should not be taxable. Have you been tracking your Roth IRA contributions or does the administrator have a record of them? Have you taken prior distributions?

 

The hardship distribution rules you are quoting generally have to do with employer-sponsored accounts. The ones that pertain to all accounts, like the first-time homebuyer, medical expenses, and qualified reservist, either don't apply to you or have already been used up. In some circumstances, you can take money out of an employer retirement account or borrow from it without penalty, but those options are not available with an IRA.

 

If you are under the age of 59 1/2 and your distributions are taxable, I am not aware of any hardship exemption for a Roth IRA distribution. However, I would check your own records as well as your retirement plan administrator to see if you have a record of your contributions and prior Roth distributions to see if this distribution even is taxable, even if you are under 59 1/2. 

Hardship Withdrawal from Roth IRA possible?

Hi,

 

I am under 59.5.  I know my contribution amount over the years.  My 1099R's for the distributions don't show a taxable amount, so I determined the taxable amount by subtracting my contributions from the distribution amount.  I never took distributions previously.

 

thanks,

Brian

MaryK4
Expert Alumni

Hardship Withdrawal from Roth IRA possible?

The hardship withdrawal applies to employer retirement plans.  Are you  referring to the penalty for early withdrawal (10%)   

 

Generally, a qualified distribution is any payment or distribution from your Roth IRA that is made after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit.
 

 

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