irs dependent for hardship withdrawal medical bills Qualifying Situations and Distribution

You're facing a medical emergency and need to pay for bills quickly, but you're worried about the IRS penalties. If you have a dependent, you might be eligible for a hardship withdrawal from your retirement account, such as a 401(k) or IRA.

To qualify for a hardship withdrawal, you'll need to show that the funds are necessary to prevent a significant financial hardship for yourself or a dependent. This can be due to medical expenses that aren't covered by insurance.

You can take a hardship withdrawal for medical expenses related to your dependent's birth, adoption, or funeral expenses. You can also take a withdrawal for medical expenses related to your dependent's illness or injury.

Additional reading: Retirement Plan Hardship Withdrawal for Medical Bills

A hardship withdrawal is a type of distribution that can be made from a retirement plan, such as a 401(k), due to an immediate and heavy financial need.

To qualify for a hardship withdrawal, you must have a financial need that is so severe it can't be met by other means, such as selling other assets or borrowing from a credit union.

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The financial need must be determined using nondiscriminatory and objective standards set forth in the plan, as required by the IRS.

Hardship withdrawals are limited to the amount necessary to satisfy the financial need, and you can't take out more than that.

For example, if you have a medical bill that you can't pay, a hardship withdrawal might be an option to help cover the cost.

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To qualify for a hardship withdrawal due to medical bills, you must meet specific eligibility requirements and follow certain rules.

You must exhaust all other means of assistance before requesting a hardship withdrawal, including in-service withdrawals allowed from your plan. Most plans allow in-service withdrawals from a rollover source at any time, and many plans allow for in-service withdrawals upon attainment of age 59 ½ or later.

To qualify for a hardship withdrawal, you must have an "immediate and heavy financial need", which can be due to medical care expenses for you, your spouse, dependents, or beneficiary. The IRS safe harbor definition specifies seven events that are automatically considered as an immediate and heavy financial need, including medical expenses.

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The IRS safe harbor definition for medical expenses includes costs for medical care for the employee, their spouse, or dependents. You must provide documentation of your hardship circumstance, which may involve showing your employer financial proof that you need the money.

Your plan document may limit the sources available to you for a hardship withdrawal, but in general, all contribution sources are available for hardship distribution. However, each plan sponsor can further restrict availability in its plan document as it deems appropriate.

The amount you can withdraw is limited to the amount necessary to cover your financial needs, including any penalties and taxes you will need to pay on the withdrawal itself. You can receive no more than two hardship distributions during a plan year, and the minimum amount you can request is $1,000.

Here are the specific hardship situations that qualify for a withdrawal:

To qualify for an IRA distribution for medical bills, you'll need to meet certain criteria. You can take a hardship withdrawal from a traditional IRA to pay for qualified medical expenses.

You're eligible if you've incurred medical expenses that exceed 10% of your adjusted gross income. This includes expenses for yourself, your spouse, or your dependents.

You can use the funds to pay for medical expenses such as doctor visits, hospital bills, and prescriptions.

Requesting a withdrawal can be a straightforward process, but it's essential to understand the requirements. You can request a hardship withdrawal from your 401(k) plan if you're experiencing a financial hardship.

To initiate the process, you'll typically need to provide documentation of your hardship circumstance, which may involve showing your employer financial proof that you need the money. This documentation will depend on the hardship situation, but some employers or third-party administrators may allow you to self-certify.

If you're using a Guideline 401(k) plan, you can submit a request directly from your Guideline dashboard. This involves clicking on the Transfers button, selecting Take money out, and then choosing the "Withdraw or borrow" option.

You'll need to enter the purpose or reason for your hardship withdrawal request and input the amount you'd like to withdraw. After submitting your request, you can track the status by accessing the Activity page under the Transfers menu. You'll also receive email notifications as you hit different milestones in the process.

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In some cases, you may be able to self-certify your hardship request, which involves confirming in writing that your request meets the plan's need and amount requirements. This is permitted as long as your employer has no actual knowledge to the contrary.

Here are the requirements for requesting a hardship withdrawal:

A hardship withdrawal can be a lifesaver when you're facing medical bills, but it's essential to understand the withdrawal limits and consequences.

You can request a minimum of $1,000, but if your vested account balance is less than $1,000, you won't be eligible for a hardship distribution.

In a calendar year, you can receive no more than two hardship distributions from your Guideline 401(k) plan.

The amount you request must not be more than the amount needed to relieve your financial need, but it can include any amounts necessary to pay taxes or penalties reasonably anticipated.

Here are the specific limits on hardship withdrawals:

Keep in mind that you'll be responsible for paying taxes on the withdrawal, and unless you qualify for a penalty exemption, you'll also face an additional 10% penalty tax.

A hardship withdrawal is considered taxable income in the year it is distributed, and you'll need to report it on your tax return.

You'll also be given the option to have federal tax withheld from your distribution, but it's essential to consult with a tax advisor to determine the correct withholding rate.

The 10% additional early distribution tax will apply unless you qualify for a penalty exemption.

It's worth noting that hardship rules are only relevant for your 401(k) with your current employer, and the hardship rules do not apply once you've been separated from the employer.

The IRS made significant changes to hardship distribution rules in 2019, making it easier for 401(k) participants to access their funds for medical bills.

These changes took effect on January 1, 2020, and are mandatory for all 401(k) plans that allow hardship distributions.

One key change is the removal of the six-month suspension rule, which previously prohibited employees from making contributions to their 401(k) plan for six months after receiving a hardship distribution.

Now, employees can make contributions immediately after receiving a hardship distribution.

The IRS also made all contribution sources available for hardship distribution, including QNECs, QMACs, safe harbor contributions, and earnings on elective deferrals.

However, implementing this change is optional, not mandatory, so not all 401(k) plans may offer this flexibility.

Another change allows employers to rely on a written representation from the participant that they have insufficient cash or other liquid assets to satisfy their financial need, assuming the employer has no actual knowledge to the contrary.

This change is also optional, but can simplify the hardship distribution process for both employers and employees.

Here's a summary of the key changes:

By understanding these changes, you can better navigate the hardship distribution process and access the funds you need for medical bills.

After taking a hardship withdrawal for medical bills, you can continue making contributions to your plan without any suspension period.

The rules used to require a six-month suspension of contributions after a hardship withdrawal, but that requirement was eliminated by the 2019 regulations.

You're free to keep contributing to your plan without any interruption, which is great news for those who need to continue saving for their future.

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