401(k) and 403(b) Test  retirement plans let you save for retirement while deferring income taxes on the saved money and earnings until withdrawal. Many employers offer 401(k) plans to which you can contribute a percentage of each paycheck. Many companies even match up to a certain percentage of your contribution.

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If your retirement plan is a section 401(k) or section 403(b), you may be able to get your money early if you face financial hardship. To qualify for a hardship withdrawal, you must prove the following:

  • You have an immediate financial need such as medical bills, a down payment on a home or a rent payment to avoid being evicted.
  • You don't have savings and you're unable to borrow from a bank.

Note, however, that any withdrawals you make will reduce the funds you have available at retirement. 

The IRS may also impose other restrictions. Even if your retirement plan permits hardship withdrawals, distributions received before age 59½ are still subject to the 10% early distribution penalty.

The early distribution penalty applies only to taxable amounts. It doesn't apply to amounts rolled over or amounts that are allocatable to after-tax investments in the plan or IRA.

There are several exceptions to the penalty. For example:

  • You are totally and permanently disabled
  • You have medical expenses that are more than 7.5% or your adjusted gross income
  • You receive money from the plan after you separate from the service of your employer during or after the year in which you reach age 55 (age 50 for qualified public service employees).

For a complete list of exceptions, see Form 5329

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