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You can take qualified withdrawals from your 401(a) plan at retirement age or upon leaving your current employer. The earliest age for retirement is 59 ½. You must pay federal income tax on withdrawals from your 401(a) plan. The IRS assesses a 10 percent tax penalty for early, unqualified withdrawals.
A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.
A distribution from a participant’s elective deferral account can only be made if the distribution is both:
The employer determines a participant has an immediate and heavy financial need based on the plan terms and all relevant facts and circumstances.
A distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if all of the following requirements are met:
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:
The amount of a hardship distribution must be limited to the amount necessary to satisfy the need. This rule is satisfied if:
You will need to provide a statement that the need can’t be relieved from other available resources, including:
An employee doesn’t have to use alternative resources if doing so would increase the amount of the need. For example, an employee requesting a hardship to purchase a principal residence doesn’t have to obtain a plan loan if the loan would disqualify the employee from obtaining other necessary financing.
A plan distribution before you turn 59½ may result in an additional income tax of 10% of the amount of the withdrawal, unless you qualify for another exception to the tax. See Retirement Topics – Tax on Early Distributions for a chart of exceptions to the 10% tax.
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