No Hardship Distribution from an IRA

An employer retirement plan, such as 401(k) plan may provide for hardship distributions. A hardship distribution must be for an immediate and heavy financial need of the employee, his spouse, or dependent. Hardship distributions are generally taxable and cannot be rolled over to an IRA or other retirement plan. They are also subject to the 10% early distribution penalty (unless an exception applies).

IRA owners have access to their IRA money at any time and there is no limit on when an IRA owner may take a distribution from his or her IRA, although there may be unfavorable tax consequences, such as the aforementioned 10% early distribution penalty.

For IRA distributions prior to age 59 ½, there is no exception to the 10% penalty for IRA distributions due to financial hardship. However, certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from an employer retirement plan are exempt from the 10% early distribution penalty. Specifically, a distribution from an IRA for higher education expenses or to finance a first-time home purchase, or for disability or excessive medical expenses, is exempt from the 10% early distribution penalty.

The Tax Courts have repeatedly said that they are bound by the list of exceptions to the 10% penalty found in the law (e.g., excessive medical expenses, disability, higher-education, IRS tax levy, first home purchases, etc.) for IRA distributions.

Occasionally, when a hurricane or other natural disaster is especially devastating, legislation is passed by Congress that provides for special distributions that would otherwise not be available to employees or IRA account owners. For example, in 2005 a law was passed to help individuals affected by Hurricane Katrina. It was later extended to other storms but does not cover any storms in 2010 or 2011.

You can find more information on taking early distributions from IRAs in IRS Publication 590. It is available on their website at www.irs.gov, click on Forms and Publications.