Does Unemployment Qualify as a Hardship 401k Withdrawal?

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Unexpected unemployment is never pleasant. Along with the emotional feelings that come with losing your job, there are additional concerns about how you’re going to pay bills and fulfill financial obligations until you find more work. As you seek to understand all of your available options, you may have considered whether you can take an IRA hardship withdrawal from funds you’ve contributed to retirement accounts.


While ideally, you’d like to leave these funds untouched, your current situation may dictate otherwise. Accessing your funds in a 401(k) or IRA early is possible, but there are significant rules, regulations and limitations you’ll need to review to determine if this is a viable option. The IRS requires those looking to withdraw funds early to have a qualifying hardship event. In other words, you can’t just pull money out because you feel like buying a new boat or going on a vacation. There are some instances where the separation of employment will qualify for a hardship withdrawal.

What qualifies as a hardship?

The IRS states that for an IRA hardship withdrawal request to be valid, it must meet two criteria — it must be due to an immediate and heavy financial need and limited to the amount necessary to satisfy that financial need. While the IRS is the final authority on the matter, it’s logical to assume that an unexpected loss of your job would create an immediate and heavy financial need. Additionally, the IRS goes further to state that even if the financial need was somewhat foreseeable or “voluntarily incurred by the employee,” it can still fall under this umbrella.

The bigger question with an IRA hardship withdrawal is whether or not you’ll be taxed the 10% early withdrawal penalty rate. Often, these tax limitations are mistaken for the list of acceptable hardship withdrawals. According to the IRS, there are three specific instances where you can access IRA funds early without incurring the additional withdrawal penalty.

First, those who lose their job during or after the year they turn 55 years of age are exempt from the penalty with 401(k)s, but not exempt on IRAs. It’s important to note this before rolling over a 401(k) into an IRA if you’re in this age bracket. Additionally, this age drops to 50 years for public safety employees at the state or federal level.

The second exemption from the early withdrawal tax comes when using the funds to pay for medical insurance premiums for yourself, your spouse or your dependents. This exemption only applies to the year you’re let go and the following year. Additionally, if you find more work, you will need to receive the distribution no later than 60 days after you start your new job.

The last option you’ll have is through the Substantially Equal Periodic Payments (SEPP) exemption. This plan allows you to take out equal payments from your 401(k) for a period of no shorter than five years. These payments will be exempt from the 10% early withdrawal penalty. The IRS lays out many different ways in how these payments are calculated, what terms they’re disbursed under and the effects it has on your future retirement contributions. Make sure you have a full understanding of all of the implications of opting for a SEPP plan before you make any decisions.

Do keep in mind that different states have varying rules and regulations about how early withdrawal funds are treated. In some states, the funds are treated as income, which may create issues for those looking to collect unemployment. To be safe, ensure you have a full understanding of all of your options before deciding on a course of action. Losing your job can be scary, but it’s no excuse to make irrational and uninformed financial decisions.

How to make a hardship withdrawal

The most time-consuming part of an IRA hardship withdrawal is understanding the pros and cons of the decision. Once you’ve decided to move forward with a hardship withdrawal, you’ll need to determine the amount you need to meet the hardship. Qualifying for hardship does not give you a blank check to pull as much money as you want out of your IRA or 401(k). There are limitations and IRS regulations on how much you can take out.

According to the IRS, you’re only allowed to take up to the amount needed to relieve the hardship. You’re allowed to pull this money if there are no other means available for you to cover the expenses. Now, just because you have other financial assets that could be used, it does not mean you’re required to utilize them first. If the use of those funds would add to the burden and hardship, you’re not required to tap into them. Employers are not required to do extensive research into whether this is the case or not. A written statement from you (barring the company has actual knowledge to the contrary) is sufficient to validate the claim.

Once your funds are approved, make sure you have a complete and thorough plan to use the funds to release the burden. This is your lifeline, an opportunity to get back on your feet and stay afloat. You’ll be able to rebuild your retirement savings once you secure new work, and the immediate need has been met.

The final word

Most people don’t plan on getting fired, which makes losing a job an unexpected and unpleasant experience. Even when you see the writing on the wall weeks or months in advance, it can still leave you and your family in an unpleasant time of need. While utilizing an IRA hardship withdrawal is never ideal, it may be your only option to bridge the financial gap until you secure future employment. By understanding your options and weighing the pros and cons, you can make a more informed decision and set yourself up for future success.

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