TVs and boats aren't allowable retirement plan hardship purchases

I ran across an interesting item on the IRS website about how you can, or rather can't, spend money you pull out of a workplace retirement plan early.

"Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution."

Yep, the quotes are correct. The statement above is directly from the IRS.

Did Uncle Sam really have to say that you don't need to be raiding your retirement account to buy a big screen TV or a fishing boat? Apparently so.

The occasional meal at a waterfront restaurant is the closest I get to being a mariner. But I am a pretty big vidiot.

I spend way too much time in front of my many television sets. Even when I'm not really watching a program, a TV is usually on serving as my talking lamp.

But even I know a TV is not one of life's necessities.

When it's OK to tap your retirement account: As this recession has made painfully clear, there certainly are times when If you need your 401(k) money early.

When you use the money appropriately, the IRS approves of such hardship withdrawals. 

But taking the money out just to blow it will cost you.

In addition to any tax due on the tax-deferred money you take out too soon, you'll be hit with a penalty of 10 percent of the amount withdrawn.

Follow the rules: If you're considering an early distribution, check out the IRS FAQs on early plan withdrawals.

And here's the relevant section (emphasis in red is mine) that includes the warning about buying television sets and boats with the money:

For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee's spouse or dependent. (Reg. §1.401(k)-1(d)(3)(i))

Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee's non-spouse, non-dependent beneficiary.

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.

A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee's spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Thus, for example, a vacation home owned by the employee and the employee's spouse generally is considered a resource of the employee, while property held for the employee's child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. §1.401(k)-1(d)(3)(iv)(B))

A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if: (1) the employee has obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer; and (2) the employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution. (Reg. §1.401(k)-1(d)(3)(iv)(E))

A hardship distribution may not exceed the amount of the employee's need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution. (Reg. §1.401(k)-1(d)(3)(iv)(A))

Here's hoping you don't ever find yourself in such straits as to need to tap your 401(k). But if you do, you now know what you can, and can't, spend the money on.

Related posts:

• 401(k) Do's and Don'ts
• Rolling regular 401(k) money into a Roth 401(k)
• Year-end retirement moves (2010)
• Get ready to retire
• Getting your rocking chairs on the same porch
• Happy 75th birthday Social Security

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