A Guide to 401(k) Hardship Withdrawals

A 401(k) hardship withdrawal is the action of taking money out of your workplace retirement plan early to deal with a life event that requires some money. You typically can’t withdraw money from your account until you reach age 59 ½, unless you need it for a specific event, in which case, a 401(k) hardship withdrawal, or hardship distribution, could help you get around some IRS penalties. These withdrawals are subject to strict conditions, however, and there are still some tax implications.

If you’re thinking of taking a hardship distribution, or just want help putting together your financial plan, consider finding a financial advisor.

What Is a 401(k) Hardship Withdrawal?

A 401(k) hardship withdrawal allows you to take money from your retirement account to cover an immediate and significant financial need. Unlike loans, these withdrawals don’t have to be repaid, but they permanently reduce your retirement savings. Because of the long-term impact, the IRS limits when and how hardship withdrawals can be used.

Hardship withdrawals are generally permitted only for specific situations defined by the IRS. These often include certain medical expenses, costs related to buying a primary home, tuition and education expenses, preventing eviction or foreclosure, funeral costs or expenses to repair damage to your primary residence. Your plan administrator ultimately determines whether a request qualifies.

The amount of a hardship withdrawal is limited to what’s necessary to meet the financial need. You typically cannot withdraw more than your vested account balance, and investment earnings may or may not be eligible depending on your plan’s rules. Employers may also require documentation to verify the hardship.

401(k) Hardship Withdrawal Eligibility

Eligibility for a 401(k) hardship withdrawal depends on strict guidelines set by the IRS and the specific rules of the employer’s plan. In other words, you cannot utilize this tax workaround if you want to take a vacation to the Caribbean.

The IRS defines “immediate and heavy financial need” as the basis for approval, with qualifying expenses including:

Medical bills
Costs to prevent eviction or foreclosure
Burial or funeral expenses
Tuition for postsecondary education
Some expenses associated with home repairs (must qualify for the casualty deduction)

Some plans may also allow withdrawals for expenses related to a natural disaster or the purchase of a primary residence.

Employers are not required to offer hardship withdrawals, and those that do may impose additional requirements or limitations. For instance, plan administrators may require documentation proving the financial need and restrict the amount withdrawn to the exact amount necessary to meet the expense. Additionally, while some withdrawals may be exempt from early withdrawal penalties, they are typically subject to income tax.

Even if you meet the requirements for a hardship withdrawal, make sure it’s the right decision for you before moving forward. They can come with real consequences such as setting your retirement savings back quite a bit, so make them your absolute last resort.

401(k) Hardship Withdrawal Limits

The IRS limits hardship withdrawals to the amount necessary to satisfy an immediate and heavy financial need. This means you generally can’t withdraw extra funds beyond what’s required to cover the expense. Plan administrators may require documentation to confirm both the hardship and the amount requested.

You can only withdraw up to your vested 401(k) balance, not the total account value if some funds haven’t fully vested. In many plans, employee contributions are eligible for hardship withdrawals, while employer matching contributions and investment earnings may be restricted. The exact limits depend on your specific plan’s rules.

Even though the IRS sets general guidelines, employers have discretion in designing their hardship withdrawal policies. Some plans allow fewer qualifying reasons or impose stricter limits than federal rules require. Reviewing your plan documents or speaking with your plan administrator is essential before making a request.

401(k) Hardship Withdrawals Disadvantages

Making the move on a 401(k) hardship withdrawal can set your retirement savings back a bit. Once you take a hardship withdrawal from your 401(k), you cannot contribute to the account for six months. So even if your finances turn around quickly, you’ll have to wait before resuming contributions to your employer-sponsored retirement plan.

Because a 401(k) hardship withdrawal is technically still a withdrawal, you will run into a 10% IRS tax penalty if you withdraw any money from your 401(k) before turning 59 ½ years old. Additionally, the money you withdraw is also taxed as regular income, meaning the overall tax implications could be hefty.

401(k) Hardship Withdrawals vs. 401(k) Loans

Taking a hardship withdrawal from your 401(k) is an alternative to taking a 401(k) loan. While you won’t have to pay the money back when you take a hardship withdrawal, the aforementioned 10% IRS tax penalty will apply. Remember that this is in addition to your standard income tax rate, meaning the IRS will hit you hard come tax time.

The flip side is that a 401(k) loan is just that, a loan. Just like any other form of debt, you’ll need to pay it back, in this case, to your own account. Failure to make on-time payments will result in not only default but a 10% withdrawal penalty as well. That’s because the IRS will consequently view your loan as income if you don’t pay it back. Should this happen, you’ll essentially incur the disadvantages of both hardship withdrawals and 401(k) loans.

Eligibility for a hardship withdrawal is dependent upon whether or not you meet the requirements above. On the other hand, your purpose for needing a 401(k) loan is completely irrelevant in the eyes of the IRS. So as long as you can pay the money back on time, you won’t run into trouble.

Bottom Line

If you’re looking into hardship withdrawals, chances are you’re in dire need of some extra money. However, once you finally resume making contributions, you’ll realize how tough it is to make up for the lost time. That’s why it’s a good idea to leave your 401(k) alone if at all possible. To ensure that you’re proceeding with the decision best suited for your financial future, it’s a good idea to consult with a financial advisor.

Retirement Planning Tips

Although a viable option, 401(k) hardship withdrawals aren’t ideal. A financial advisor may be able to put together a financial plan that doesn’t involve dipping into your hard-earned retirement money. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Social Security can be a valuable supplement to your existing retirement funds. If you’re unsure about how much money you’re in line to receive, check out SmartAsset’s Social Security calculator. All you need to know is your annual income and the age at which you’re planning to start receiving benefits.
If you want to handle your retirement plans on your own, make sure you’re not flying blind. SmartAsset’s retirement calculator can help you estimate how much you’ll need to save for your desired retirement lifestyle.