Can a Hardship Withdrawal Be Denied?

A hardship withdrawal allows you to take money out of your 401(k) or IRA before retirement age without the usual 10% early withdrawal penalty. However, these types of withdrawals are subject to strict IRS guidelines and plan rules. As a result, your hardship withdrawal request can be denied under certain circumstances.

I want to provide a comprehensive overview of hardship withdrawals, when they can be denied, and alternatives if your request is rejected. My goal is to help you understand the hardship withdrawal process so you can navigate it successfully if the need arises.

What is a Hardship Withdrawal?

A hardship withdrawal allows you to access your retirement savings early, penalty-free, to cover certain immediate and heavy financial needs The IRS outlines six categories of expenses that qualify for a penalty-free hardship withdrawal

• Medical care expenses
• Costs related to purchasing your primary home
• Tuition and education fees
• Funeral and burial costs
• Expenses to repair damage to your primary home
• Preventing eviction or foreclosure

To qualify, you must demonstrate that you have no other means to cover the expense The withdrawal amount is limited to the amount you need to cover the hardship

Hardship withdrawals are allowed from 401(k) plans and traditional IRAs. Rules differ slightly between 401(k)s and IRAs in terms of which specific expenses qualify and documentation required.

When Can a Hardship Withdrawal Be Denied?

While hardship withdrawals provide access to retirement funds during emergencies, they are subject to strict IRS and plan guidelines. As a result, your hardship withdrawal request can be denied in certain situations:

Your employer’s plan does not allow hardship withdrawals

The IRS allows but does not require 401(k) and 403(b) plans to permit hardship withdrawals. If your plan does not, your request will automatically be denied. Review your plan documents or ask your HR department to confirm if hardship withdrawals are allowed.

Your reason does not qualify as a hardship

The IRS defines specific circumstances that qualify as a financial hardship. If your reason does not align with one of the IRS-approved categories, your withdrawal will likely be denied. For example, paying off credit card debt or purchasing a car do not qualify.

Make sure your situation aligns with the IRS hardship definitions before submitting your request.

You cannot prove financial need

You must demonstrate that you have an immediate and heavy financial need, and no other way to meet that need, for your hardship withdrawal request to be approved.

Your employer may require documentation like medical bills, home purchase contracts, tuition invoices, etc. Failure to provide documentation can result in your request being denied.

You request too much money

Hardship withdrawals are limited to the amount necessary to cover your financial need. If you request more than needed, the excess portion may be denied. Carefully determine the specific amount required and do not inflate your request.

You have not exhausted other options

Most plans require that you explore all other options, like loans or other withdrawals, before approving a hardship request. If you have not maxed out loans or non-hardship withdrawals available, your request may be denied.

You recently took another hardship withdrawal

Plans often limit employees to one or two hardship withdrawals per year. If you have exceeded the limit, additional requests may be denied that year.

Alternatives if Your Hardship Withdrawal is Denied

If your hardship withdrawal request gets rejected, consider the following alternatives to access needed funds:

• 401(k) or IRA loans – If allowed by your plan, loans let you borrow from yourself penalty-free and pay back over time.
• Non-hardship withdrawals – Some plans allow penalty-free withdrawals at age 55 or later.
• Substantially equal periodic payments (SEPPs) – SEPPs allow you to take regular withdrawals without penalty.
• Stop contributions – Halt new 401(k) contributions to redirect that money.
• Other savings – Tap emergency, health, or other savings you have.
• Cut expenses – Look for expenses you can reduce to free up cash flow.
• Credit cards or personal loans – Use as a last resort if needed and affordable.

The bottom line is a hardship withdrawal should be a last option. Take time to fully explore other alternatives if your request gets denied.

Tips to Avoid Denial

To boost your chances of approval, keep these tips in mind when submitting a hardship withdrawal request:

• Review plan rules – Understand if your plan permits hardship withdrawals and requirements.
• Document your hardship – Provide invoices, bills, or other proof of your financial need.
• Request only what you need – Do not inflate the amount. Only ask for the exact funds required.
• Exhaust other options first – Take loans or other withdrawals available before requesting hardship.
• Watch withdrawal frequency – Ensure you have not exceeded annual withdrawal limits.

Following these best practices will help demonstrate you have an eligible financial hardship and have no other means to address it. That will go a long way towards getting your withdrawal approved.

The Impact of a Hardship Withdrawal

While a hardship withdrawal can provide needed cash, it can have consequences you need to consider:

• You lose contribution room – The amount withdrawn cannot be replaced.
• You may be suspended from contributing – Many plans freeze contributions for 6 months after.
• Taxes and penalties still apply on IRAs – You owe income tax on the withdrawal.
• It hurts long-term growth – You lose tax-deferred investment growth on the funds.

A hardship withdrawal should be a last resort when you have no other choice. Explore all other options before tapping your retirement savings.

Key Takeaways

• Hardship withdrawals allow penalty-free access to 401(k) and IRA funds for specific financial emergencies.
• However, strict IRS and plan guidelines mean your request can be denied in certain situations.
• If your hardship withdrawal is rejected, look into other options like loans or cutting expenses.
• Follow best practices when submitting your request to boost chances of approval.
• Carefully consider the impacts before moving forward with a hardship withdrawal.

Hardship withdrawals can be a financial lifeline during difficult times if approved. But they also permanently reduce your retirement savings. Understand the rules, alternatives, and impacts to decide if a hardship withdrawal is truly your best course of action. With the right approach, you can navigate the process successfully and get the funds you need.