Hardship Withdrawal Rules for a Fidelity Investments 401(k)

Piggy bank

Fidelity Investments operates a number of different types of 401(k) plans that all must comply with Internal Revenue Service (IRS) regulations, including those regarding hardship withdrawals. Employers are not required to permit hardship withdrawals from their 401(k) plans, but most do. To comply with plan and IRS regulations, if you intend to take a hardship withdrawal from a Fidelity Investments 401(k), you must be able to provide compelling evidence for why you should avoid tax penalties.

Loan Options

The IRS requires that you exhaust all the loan options available under your 401(k) plan before taking a hardship withdrawal. A 401(k) loan typically allows you to borrow up to 50 percent of the value of your account tax-free, provided you follow certain regulations in paying it back. If your hardship is short-term in nature and you are willing to pay back the amount you need over time, the 401(k) loan might be a sufficient option for you.

Financial Need

IRS regulations state that hardship withdrawals are allowed from 401(k) plans only if there is an immediate and heavy financial need and you have no other way to satisfy this need. Also, the withdrawal cannot exceed your need, and you cannot contribute to the 401(k) for six months following your withdrawal.

The IRS defines six areas of need that qualify for a hardship withdrawal: unreimbursed medical expenses for you or your family; the purchase of a primary residence; payment of college tuition and related costs for family members; payments necessary to prevent eviction or foreclosure; funeral expenses; and certain expenses for the repair of damage to a primary residence.

Taxes

A withdrawal from a 401(k) plan, even a hardship withdrawal, is subject to ordinary income taxation, and if you are under the age of 59 1/2, the IRS may levy a 10 percent penalty on your withdrawal as well. Your state may tax the withdrawal as well.

Withdrawal Limits

Hardship withdrawal amounts usually are limited to the contributions made by the owner and cannot include any income earned. The plan's rules determine if employer matching contributions may be withdrawn.

Future Contributions

No employee contributions can be made to the 401(k) plan for at least six months after a hardship withdrawal.

Fidelity Paperwork

The Fidelity 401(k) administrator has the proper paperwork for hardship withdrawals, and this requires documentation that verifies your eligibility, such as medical bills or pay stubs. After you file the relevant hardship paperwork with the administrator, you can expect to receive a check at your mailing address within a few business days.

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