What Is a Hardship Withdrawal and What Qualifies?

A financial hardship refers to a situation involving an immediate and severe financial need that an individual cannot meet through other reasonably available resources. This concept becomes relevant when accessing funds that are typically restricted, such as those held in retirement accounts. Understanding what constitutes a hardship is the initial step for individuals seeking to access funds outside of standard withdrawal rules.

Defining Hardship and Recognized Qualifying Events

A financial hardship is defined as an immediate and heavy financial need that cannot be satisfied by other means, including the liquidation of other assets or cessation of contributions. The Internal Revenue Service (IRS) outlines specific circumstances that qualify as an “immediate and heavy financial need” for distributions from certain retirement plans.

The most common categories of qualifying hardship events include:
Expenses for medical care for the individual, their spouse, dependents, or primary beneficiary, as defined by Section 213 of the Internal Revenue Code.
Costs directly related to the purchase of a principal residence, excluding mortgage payments.
Educational expenses for the next 12 months, covering tuition, related fees, and room and board for the individual, spouse, dependents, or primary beneficiary.
Payments necessary to prevent eviction from the individual’s principal residence or foreclosure on its mortgage.
Funeral expenses for a deceased parent, spouse, children, primary beneficiary, or other dependents.
Expenses for the repair of damage to the individual’s principal residence that would qualify for a casualty deduction under federal tax law.

Gathering Necessary Documentation

To substantiate a hardship claim, specific documentation is required, varying with the nature of the qualifying event. For medical expenses, individuals provide itemized medical bills and Explanation of Benefits (EOB) statements from insurance providers. When the hardship relates to the purchase of a principal residence, a purchase agreement and closing disclosure documents are necessary. For educational expenses, tuition invoices, bursar statements, and proof of enrollment are requested.

Preventing eviction or foreclosure requires documentation such as an eviction notice, a foreclosure notice, or current mortgage statements. In cases of funeral expenses, a funeral home invoice and a death certificate are the primary documents. For home repairs due to casualty damage, repair estimates, contractor invoices, and evidence of the damage, such as insurance claims or photographs, are required. All documentation must be specific, verifiable, and often dated to demonstrate the immediate nature of the financial need. Some plans may also require a signed statement confirming no other reasonably available funds exist, and individuals remain responsible for retaining all supporting documentation in case of an IRS audit, even if self-certification is allowed.

Submitting a Hardship Claim

Once all necessary documentation is prepared, the process of submitting a hardship claim begins by contacting the plan administrator, such as an employer’s human resources department or the financial institution managing the account. They will provide the specific application forms that need to be completed. Submission methods often include online portals, mail, or fax, depending on the administrator’s capabilities.

After submission, the claim undergoes a review period, typically taking less than a day but potentially extending to five to seven business days if additional questions arise. The administrator may request further information or clarification during this time. Following the review, the individual will receive a notification regarding the approval or denial of their request. If approved, funds are usually disbursed within two to three business days for direct deposit or seven to ten business days if sent via mail. The amount approved for withdrawal cannot exceed what is necessary to cover the immediate financial need, including any anticipated taxes and fees resulting from the distribution.

Understanding the Financial Impact

A hardship distribution generally has significant financial implications, primarily concerning taxation. The amount withdrawn is typically subject to taxation as ordinary income in the year it is received. While Roth contributions are generally tax-free, any earnings from those contributions may be taxable. Beyond income tax, an additional 10% early withdrawal penalty usually applies if the individual is under age 59½ at the time of the distribution.

Several exceptions exist that may allow individuals to avoid this 10% penalty, even if they are under age 59½. These include withdrawals for unreimbursed medical expenses exceeding 7.5% of adjusted gross income, qualified higher education expenses, or up to $10,000 for a first-time home purchase from an Individual Retirement Account (IRA). Other exceptions cover distributions due to permanent disability, certain payments for health insurance while unemployed, or expenses incurred from certain federally declared disasters. However, even with an exception, the distribution remains subject to ordinary income tax. Unlike a loan, a hardship distribution is not repaid to the plan or rolled over to another retirement account, permanently reducing the individual’s retirement savings balance.