Summertime. For many, it’s made for vacations, nice weather, and a more laid back time to celebrate. For others, it means hurricane season. Having grown up on the outer banks of North Carolina, I’ve lived through my share of storms. My grandmother had a magnetic map tracking the various hurricanes and tropical storm paths to plan out how effected we may be.
Sometimes, I look fondly back at the times where my family and I were holed up with candles and games. Unfortunately, this same experience can leave folks with property damage or homelessness.
Your 401(k) can come to your rescue if your plan has a hardship provision.
What is a hardship provision and how do you qualify? Here’s how:
- Medical expenses
- Purchase of a primary residence
- Ongoing education
- Prevention of eviction from primary residence
- Burial or funeral expenses
- Expenses for the repair of the damage to primary residence
With recent natural disasters such as tornadoes and hurricanes, this last rule is certainly timely. In fact, the IRS provided relief in 2005 to hardship distributions made between August 29 and March 31, 2006. This made it easier for savers to rely on their savings for the unexpected and severe damages.
While this access is great, it’s got it’s own rules around it. These distributions are taxable in the year it was received along with a 10% penalty for taking out prior to retirement. It’s also important to note that not all 401(k) plans contain this provision. Loans are much more preferred and come without 10% penalty while allowing you to pay yourself back.
Talk to your controller/hr person/plan sponsor for more information on what kind of access you have. While it’s great to maintain your savings, but it’s nice to know it’s got your back when you need it!