A hardship withdrawal is a special type of distribution from
an employer-sponsored retirement plan, which the IRS allows only for
participants who can prove they are facing an "immediate and heavy
financial need." However, the IRS does not require retirement plans to
allow hardship withdrawals. Instead, it leaves that decision up to each
individual plan.

To determine whether your plan allows hardship withdrawals,
ask your plan sponsor or plan administrator. You can also check in the plan
document, which is the official communication that details all of your plan's
rules and regulations.

The money a participant receives from a hardship withdrawal
can be taken from his or her accumulated elective contributions, but not from
earnings on those contributions. Employer contributions may also be included in
a hardship withdrawal, but only if the plan allows.

In order to qualify for a hardship withdrawal, a participant
must prove that the money will be used to pay for at least one of the following
expenses:

• Medical care for the participant, the participant's spouse, dependents, and/or
  beneficiaries.
• The purchase of the participant's principle residence (not including mortgage
  payments).
• Post-secondary education expenses for the participant, participant's spouse, dependents,
  and/or beneficiaries.
• Payments to prevent eviction or foreclosure.
• Funeral costs.

In addition, the worker requesting the hardship withdrawal
needs to have previously obtained all other possible distributions and
non-taxable loans available through the retirement plan.

The amount of a hardship withdrawal may not exceed the amount
of the participant's stated financial need, and will be subject to ordinary
income taxes and a 10% early withdrawal penalty. Participants who receive a hardship
withdrawal are not allowed to repay the money back to the retirement plan and
are generally not allowed to resume contributions to the plan for six months.

Required Attribution

Because of the possibility of human or mechanical error by
McGraw-Hill Financial Communications or its sources, neither McGraw-Hill
Financial Communications nor its sources guarantees the accuracy, adequacy,
completeness or availability of any information and is not responsible for any
errors or omissions or for the results obtained from the use of such
information. In no event shall McGraw-Hill Financial Communications be liable
for any indirect, special or consequential damages in connection with
subscriber's or others' use of the content.

###

© 2011 McGraw-Hill
Financial Communications. All rights reserved.

October 2011 — This column is provided through the
Financial Planning Association, the membership organization for the financial
planning community, and is brought to you by Ronald J. VanSurksum, CFP® , a
local member of FPA.