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Can I use a "hardship" exception to avoid tax and penalties on a withdrawal from my 401(k)?

It may depend on the wording of your 401(k) plan, which may or may not permit hardship distributions and may limit the categories of hardship that qualify. The IRS, in addition, has its own criteria for determining "hardship." For a distribution from a 401(k) plan to be "on account of hardship," there must be an immediate and heavy financial need and the amount distributed must be limited to the sum needed to satisfy the financial need. Whether a need is "immediate and heavy" depends on the facts and circumstances, including the availability of other resources, but certain categories generally qualify: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the taxpayer’s principal residence. Note that the hardship distribution is still taxed as income unless the money withdrawn consisted of designated Roth contributions. All you can hope to avoid is the 10 percent penalty on early distribution.

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