Some people may realize at some point in their life that they need to make use of their retirement savings in order to meet their financial obligations. By opting for an early 401k withdrawal, they are often able to stay afloat just long enough to get back on their feet. To do this, they must write a hardship distribution 401k letter. The steps in writing it are described below.
1. Meet the Relevant Criteria
The IRS (Internal Revenue Service) will only accept an early withdrawal if the account holder can demonstrate “immediate and heavy financial need“. This means that it must be used to pay for funeral expenses, repairing extreme property damage, stopping an eviction, paying for educational expenses, buying a primary residence, or medical care. Details are listed in Reg. 1.401(k)-1(d)(3)(1).
2. Format It Properly
Next, speak to your broker or HR department to ensure that you are addressing the letter to the right people. The document you write should be free from spelling and grammatical errors. It should highlight your personal details, as well as your account number. Do also complete some online research for samples of opening sentences.
3. Draft Your Letter
Your letter should start with an explanation of your circumstances. Include any evidence of this as attachment. Explain why the only recourse you can see is an early withdrawal. Be specific about the amount and state that you know the consequences of doing this. Make sure to include any dates on which you have missed payments as well.
4. Edit Your Letter
As much as possible, your letter should be no longer than one page. Your desired outcome should be one of the first things that you mention. Take out any of the details that were added in the draft that are obvious and make sure to stick to facts and avoid showing any emotion.
5. Proofread and Send the Letter
One you have edited your letter, you need to proofread it. If at all possible, you should ask someone else to do it for you. If not, leave the letter overnight and read it the next day. Read it aloud as well, to make sure that it sounds right. Include all the relevant attachments and make sure that you photocopy everything. Date your letter and send it, and make sure that you request a return receipt.
6. Follow Up
Do not accept silence as a response to your letter. Call your fund manager, your contact in HR, or your broker after a week, even if it is just to make sure that the letter has been received. Make sure that you have also consulted with your tax preparer or accountant. This is all about being proactive and understanding what is going to happen next. If your request is accepted, for instance, you may not be able to contribute to your plan for between six months and a year.
There are never any guarantees that a hardship letter will be accepted favorably. However, with these tips, you may greatly increase your chances. Do remember that withdrawing from your retirement account should be a last resort only.
Hardship Distribution 401k Letter Example
{Name}
{Address}
{Phone #}
{Date}
Dear {fund manager}:
Due to immediate and heavy financial need, I must now apply for hardship distribution of funds in my 401(k), as allowed under IRS “safe harbor” regulations.
I am now responsible for {medical expenses/purchase of a principal residence/mortgage payments/tuition/repairs to my residence/funeral expenses}. These costs far exceed the amount of cash or credit I am able to access.
I am seeking to withdraw {amount}, which is only the amount necessary to satisfy this immediate need. I cannot obtain funds from any other source or by liquidating assets.
I understand that I will be taxed on the amount distributed and that I may face additional related taxes.
Sincerely,
{Sender Name}