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How to Make a 401(k) Hardship Withdrawal


Facing financial hardship can be an overwhelming and stressful experience, especially when it feels like your options are limited. You may consider a 401(k) hardship withdrawal as a potential solution to your immediate financial needs if you’re younger than 59 ½. However, before making this decision, you’ll want to fully understand what a 401(k) hardship withdrawal entails, the consequences it can have on your long-term financial well-being, and the alternative options available to you. A financial advisor can help you plan for financial emergencies and make hard decisions when they arise. 

What Is a 401(k) Hardship Withdrawal?

A 401(k) hardship withdrawal is a type of early withdrawal from a 401(k) retirement account that is allowed under certain circumstances. Retirement plans may permit hardship withdrawals, but they’re not required to. In fact, some plans may not allow any type of early withdrawal, so it’s important to check your plan’s rules.

According to the IRS, a hardship withdrawal must meet two criteria:

  • It must be due to an “immediate and heavy financial need.”
  • The withdrawal amount must be necessary to satisfy that financial need.

Furthermore, these withdrawals are subject to income taxes, and in some cases, a 10% early withdrawal penalty.

But what kinds of expenses qualify for a 401(k) hardship withdrawal? According to the IRS, “an employee is automatically considered to have an immediate and heavy financial need” if a withdrawal from a 401(k) plan is for any of these six needs:

Medical Expenses

Medical expenses that are not covered by insurance and are related to your care or the care of your spouse, dependents or beneficiary may qualify for a penalty-free 401(k) hardship withdrawal. Examples of qualifying medical expenses include surgery, hospitalization, medical treatments, prescription medications and emergency dental procedures. To qualify for a penalty-free withdrawal, the unreimbursed medical expenses must exceed 7.5% of your adjusted gross income (AGI).

Principal Home Purchase

Expenses that are directly associated with the purchase of a primary home, excluding mortgage payments, may qualify for a 401(k) hardship withdrawal. Qualifying costs include down payments, closing costs, and other fees associated with the purchase of a principal residence. The withdrawal amount is typically limited to a specific dollar amount. A 10% early withdrawal fee typically applies for hardship withdrawals associated with the purchase of a home. However, the IRS permits qualified first-time homebuyers to withdraw up to $10,000 from their IRA penalty-free.

Education Expenses

Tuition, fees, room and board and related postsecondary educational expenses also may qualify for a 401(k) hardship withdrawal. The distribution must be used for “the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary,” the IRS states. However, a 10% early withdrawal fee also applies to hardship withdrawals for education expenses.

Eviction or Foreclosure

A 401(k) hardship withdrawal may be permitted to stave off eviction from your primary residence or foreclosure on the mortgage of your primary residence. You’ll need to provide documentation, such as an eviction notice or foreclosure notice, to prove the imminent risk of losing their primary residence. The withdrawal amount is limited to the amount necessary to prevent the eviction or foreclosure. These hardship withdrawals can help prevent eviction or foreclosure, but they also trigger the 10% early withdrawal penalty.

Funeral Expenses

Funeral expenses for yourself or your spouse, children, dependents or beneficiary may be covered by a 401(k) hardship withdrawal. The withdrawal amount is limited to the actual cost of the funeral expenses, which may include funeral home services, burial or cremation costs and related expenses. Like most hardship withdrawals, early distributions for funeral expenses trigger the 10% tax penalty.

Home Damage

A 401(k) hardship withdrawal may be used to cover costs associated with certain repairs needed on a person’s primary residence. Qualifying home damage must result from a sudden, unexpected or unusual event, such as a natural disaster, fire, flood, earthquake or severe storm. The withdrawal amount is limited to the actual cost of the repairs, minus any insurance reimbursements or other compensation received. The 10% early withdrawal penalty also applies.

The 401(k) Hardship Withdrawal Process

A couple stresses over mounting medical bills and considers taking a 401(k) hardship withdrawal.

Before proceeding with a hardship withdrawal, you’ll want to review your plan’s specific rules, as not all plans offer this option, and procedures can vary.

Eligibility criteria typically include exhausting all other financial resources and demonstrating an immediate and heavy financial need.

To initiate a hardship withdrawal, you typically will need to: 

  1. Document your financial need by gathering necessary documentation, such as medical bills, tuition statements or foreclosure notices.
  2. Contact your plan administrator to request the withdrawal, filling out specific forms and providing supporting documents.
  3. When determining the withdrawal amount, only withdraw what is necessary to cover the hardship, as excess withdrawals are not allowed and can further erode your retirement savings.
  4. Exhaust all alternative options, such as loans or financial assistance programs, before resorting to a hardship withdrawal.

Processing times for hardship withdrawal requests can vary, typically ranging from seven to 10 business days, but some plans may take up to 30 days to review and approve the request.

Financial Implications of a 401(k) Hardship Withdrawal

Beyond the immediate financial consequences, a 401(k) hardship withdrawal can have a profound long-term impact on your retirement savings. The withdrawn funds will no longer benefit from tax-deferred growth and the reduced account balance may lead to a smaller nest egg at retirement.

For example, if a 30-year-old withdraws $5,000 from their 401(k) and the account would have earned an average annual return of 7% until retirement at age 65, the lost growth on that $5,000 would amount to approximately $54,000. This significant loss in potential retirement savings underscores the importance of carefully weighing the long-term consequences before taking a hardship withdrawal.

Also be mindful of the automatic tax withholdings. When making a 401(k) hardship withdrawal, the plan will withhold a mandatory 20% for income taxes, although your final tax liability associated with the distribution may be more or less. In addition, some plans may not allow new contributions for up to six months following the hardship withdrawal.

Alternatives to a 401(k) Hardship Withdrawal

A woman considers taking a 401(k) hardship withdrawal to cover some costs associated with her first home purchase.

Before resorting to a 401(k) hardship withdrawal, you’ll have to explore alternative financial resources that may be available. Tapping into personal savings, emergency funds or liquidating non-retirement investments should be considered as a first line of defense. 

Examples of non-retirement investments that could be liquidated include individual stocks, corporate or government bonds, mutual funds, exchange-traded funds (ETFs) or real estate investment trusts (REITs). These investments often provide more flexibility and incur fewer penalties compared to withdrawing from a 401(k) prematurely, making them a more attractive option for those facing financial hardship. Various borrowing options may also be preferable to a 401(k) hardship withdrawal.

A 401(k) loan, for instance, is repaid (to yourself) over a period of five years. Personal loans from banks or credit unions are another option, while homeowners may consider home equity loans and lines of credit. Borrowing from family or friends may also be a viable option, potentially offering low or no interest, but it is essential to establish a formal agreement to maintain healthy relationships.

Bottom Line

While a 401(k) hardship withdrawal can provide immediate financial relief in situations like medical or funeral expenses, it is crucial to understand the long-term impact on retirement savings. Ultimately, a 401(k) hardship withdrawal may be among your last resorts. You’ll want to carefully weigh the short-term benefits against the long-term consequences to your retirement security.

Tips for Managing Your 401(k)

  • Having a good understanding of your investment options within your 401(k) plan is the first step in managing it effectively. While you may be somewhat limited in terms of the individual securities that are available within your plan, you will likely have various target-date funds. This funds, which have an asset allocation that’s aligned with when you plan to retire, automatically rebalance toward more conservative investments as the target date approaches.
  • A financial advisor can help you select investments for your 401(k). Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.

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