Q:

What are the reasons for a hardship withdrawal on a 403(b) retirement plan?

A:

Quick Answer

Valid reasons for a hardship withdrawal from a 403(b) retirement plan include medical expenses, education expenses, funeral expenses, purchase of a primary home, repairs to a primary home or payments to prevent eviction from a primary home, reports the IRS. Purchase of personal property does not usually qualify.

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Full Answer

A 403(b) plan is not required to allow for hardship distributions, but if it does, the distribution must only be made for immediate and heavy needs of the employee, according to the IRS. The account holder is required to first tap all other loans, insurance, distributions and assets available to the employee, spouse and minor children. The specific terms of the plan usually specify how an employee demonstrates hardship to an employer when requesting a hardship withdrawal. The amount available for a hardship distribution is generally capped by the total amount of the employee's elective contributions.

The account holder must pay full income tax on hardship distributions, and some distributions incur a penalty tax as well, states the IRS. The amount withdrawn may not exceed the employee's need, although taxes and penalties may be included. Taking an early withdrawal from a retirement account should be a last option not only because of the heavy taxes and penalties, but also the loss of the retirement nest egg, advises AARP. Employees should first look into taking out a loan from the 403(b) or another retirement plan or insurance policy.

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