Hardship withdrawal from a retirement plan

[Pacun]

The 401k plan reads:

"To be eligible for a hardship withdrawal, you must demonstrate a need for the withdrawal due to a qualifying hardship provision. Hardship withdrawals will be reviewed carefully and will not be issued for any amount over the documentation supplied for the hardship even when the participant requests. Documentation supporting the amount needed for the hardship must clearly state the amount needed. If there are multiple documents each document must clearly state the amount and reason for payment.

The Internal Revenue Service has the following established guidelines on what financial situations qualify as a hardship:

* To prevent eviction from, or foreclosure of, the participant's primary place of residence

* The purchase of the participant's primary residence

* To pay medical expenses that would be deductible under Internal Revenue Service (IRS) Code Section 213(d), determined without regard to whether those expenses exceed 7.5% of the participant's annual gross income

Note: Nonprescription drugs (excluding insulin) are not deductible under 213(d). Therefore, these are not considered medical expenses for hardship withdrawal purposes.

* Paying tuition, related educational fees, and room and board expenses for the next 12 months of post secondary education for the participant, their spouse, children or dependent(s)

* Burial or funeral expenses for a participant's deceased parent, spouse, children, or dependent(s)

* Certain expenses relating to the repair of damage to a participant's personal residence that would qualify for casualty deduction under Code Section 165 without regard to whether the loss exceeds 10% of adjusted gross income"

I know this is long but it is good information to read anyways. Now my question, client's mother is NOT in US, Mexico or Canada and she is suffering from terminal cancer. Client wants to withdraw $10K from 401k to cover medical expenses for her mother. Those expenses would be deductible under 213(d) if other provisions were true. Would this qualify for hardship withdrawal? If parent would be in US, Mexico or Canada, she would qualify as a dependent. What do you think? I am saying no, but I would like to read the arguments.

[Lion EA]

There's no tax savings due to hardship; it's just a method to qualify to withdraw while still an employee. The employee must qualify for his employer's definition of hardship to make a withdrawal, so it's between them.

Why doesn't he borrow instead of withdraw? Then, he won't have to fit within his employer's definition of hardship and can pay himself back over time.

[Jack from Ohio]

The 401k plan reads:

"To be eligible for a hardship withdrawal, you must demonstrate a need for the withdrawal due to a qualifying hardship provision. Hardship withdrawals will be reviewed carefully and will not be issued for any amount over the documentation supplied for the hardship even when the participant requests. Documentation supporting the amount needed for the hardship must clearly state the amount needed. If there are multiple documents each document must clearly state the amount and reason for payment.

The Internal Revenue Service has the following established guidelines on what financial situations qualify as a hardship:

* To prevent eviction from, or foreclosure of, the participant's primary place of residence

* The purchase of the participant's primary residence

* To pay medical expenses that would be deductible under Internal Revenue Service (IRS) Code Section 213(d), determined without regard to whether those expenses exceed 7.5% of the participant's annual gross income

Note: Nonprescription drugs (excluding insulin) are not deductible under 213(d). Therefore, these are not considered medical expenses for hardship withdrawal purposes.

* Paying tuition, related educational fees, and room and board expenses for the next 12 months of post secondary education for the participant, their spouse, children or dependent(s)

* Burial or funeral expenses for a participant's deceased parent, spouse, children, or dependent(s)

* Certain expenses relating to the repair of damage to a participant's personal residence that would qualify for casualty deduction under Code Section 165 without regard to whether the loss exceeds 10% of adjusted gross income"

I know this is long but it is good information to read anyways. Now my question, client's mother is NOT in US, Mexico or Canada and she is suffering from terminal cancer. Client wants to withdraw $10K from 401k to cover medical expenses for her mother. Those expenses would be deductible under 213(d) if other provisions were true. Would this qualify for hardship withdrawal? If parent would be in US, Mexico or Canada, she would qualify as a dependent. What do you think? I am saying no, but I would like to read the arguments.

To be deductible, the expenses would need to be for the taxpayer or one of his dependents. If the mother meets all requirements for and is claimed as dependent, then in my opinion, the expenses would qualify.

If not a dependent, then NO.

[Pacun]

There's no tax savings due to hardship; it's just a method to qualify to withdraw while still an employee. The employee must qualify for his employer's definition of hardship to make a withdrawal, so it's between them.

Why doesn't he borrow instead of withdraw? Then, he won't have to fit within his employer's definition of hardship and can pay himself back over time.

"Why doesn't he borrow instead of withdraw?" Let's say that this person has two hardships: One economic and the other medical.

I like Jack's answer since that section of the code is for you, your spouse, your current dependents or for dependents who were your dependents when you pay the bill or when the treatment was received.