How to Make a 401(k) Hardship Withdrawal

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What Is a 401(k) Hardship Withdrawal?

A 401(k) hardship withdrawal is a withdrawal from a 401(k) for an "immediate and heavy financial need." It is an authorized withdrawal, meaning the IRS can waive penalties, but it does not relieve you of your tax responsibilities.

Before you tap your retirement savings to cover a large, unexpected expense, check that you're allowed to do so. The IRS has specific rules for hardship withdrawals, and your plan sponsor may have additional rules as well.

Key Takeaways

• A hardship withdrawal from a 401(k) retirement account is for large, unexpected expenses.
• Unlike a 401(k) loan, the funds need not be repaid. But you must pay taxes on the amount of the withdrawal.
• A hardship withdrawal can give you retirement funds penalty-free, but only for specific qualified expenses such as crippling medical bills or a disability.

Understanding 401(k) Hardship Withdrawals

The Internal Revenue Service (IRS)'s “immediate and heavy financial need” stipulation for a hardship withdrawal doesn't just apply to the account holder. You can make these withdrawals to accommodate the needs of a spouse, dependent, or beneficiary.

Immediate and heavy expenses can include the following:

• Certain expenses to repair casualty losses to a principal residence (such as losses from fires, earthquakes, or floods)
• Expenses to prevent being foreclosed on or evicted
• Home-buying expenses for a principal residence
• Up to 12 months’ worth of tuition and fees
• Burial or funeral expenses
• Certain medical expenses

You won’t qualify for a hardship withdrawal if you have other assets you could draw on or insurance covering the need. However, you needn't necessarily have taken a loan from your plan before you can file for a hardship withdrawal. That requirement was eliminated in reforms passed in 2018.

Even if your employer offers hardship withdrawals, you should be cautious about using them. Financial advisors typically counsel against raiding your retirement savings except as an absolute last resort.

Though hardship withdrawals are legal, you might not be able to make one. That decision is still up to your employer or plan sponsor who may choose not to offer this option. If the plan does allow hardship distributions, it must specify the criteria that define a hardship, such as paying for medical or funeral expenses. Your employer will ask for specific information and possibly documentation of your hardship.

401(k) Hardship Withdrawal Amounts

Hardship withdrawals must be for the amount “necessary to satisfy the financial need.” That sum can include what’s required to pay taxes and penalties on the withdrawal.

The maximum withdrawal can represent a larger proportion of your 401(k) or 403(b) plan. If your employer allows it, you may withdraw its contributions plus any investment earnings in addition to your salary-deferral contributions.

You’ll also be able to keep contributing, which means you’ll lose less ground on saving for retirement and still be eligible to receive your employer’s matching contributions.

Cost of a 401(k) Hardship Withdrawal

Hardship withdrawals can help you avoid extreme financial hardship. However, they will hurt your ability to save for retirement. Not only are you removing money you've set aside for your post-paycheck years, but you're also losing the interest that money would have earned over time. You'll also be liable for paying income tax on the withdrawal amount and will have to pay it at your current rate, which may be higher than if the funds were withdrawn in retirement.

If you're under 59½, you may be subject to the 10% penalty as well, though this exception is waived under the following circumstances:

• A corrective distribution, or money repaid to you as a highly compensated employee deemed to have contributed too much to a 401(k) compared to other employees
• Certain distributions to qualified military reservists called to active duty
• Qualified birth or adoption expenses
• Death of the account owner
• Disaster recovery after a federally-declared disaster
• Domestic abuse
• Qualified higher education expenses
• Terminal illness
• A qualified domestic relations order, issued as part of a divorce decree
• Medical expenses in excess of 10% of adjusted gross income (AGI)
• A dividend pass-through from an Employee Stock Ownership Plan
• A series of substantially equal periodic payments
• Employee separation from service after age 55
• Total and permanent disability
• IRS levies on the plan

401(k) withdrawal rules differ slightly from rules for hardship withdrawals from a traditional IRA.

Other Options for Accessing Your 401(k) Money

If you can wait until you're at least 59½, you can withdraw funds from your 401(k) without penalty, whether you're suffering from hardship or not. You might be able to borrow money from 401(k) if your employer or plan sponsor permits it. However, this puts you in another financial bind because you have to repay it within five years.

While you can borrow from your 401(k), it's worth taking the time to determine how the loan will affect the nest egg you've been accumulating for your retirement. However, the loan might be worth considering instead of a withdrawal if you can repay the loan in the allotted time.

Loans are generally permitted for the lesser of half your 401(k) balance or $50,000 and must be repaid with interest. However, the principal and interest payments are made to your retirement account. If you should default on the payments, the loan converts to a withdrawal, with most of the same consequences as if it had originated as one.

How Long Does a 401(k) Hardship Withdrawal Take?

A hardship withdrawal can take 7-10 business days, which includes a review of your withdrawal application.

How Do You Prove Hardship for a 401(k) Withdrawal?

You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship. You will want to keep documentation or bills proving the hardship, however.

How Is a 401(k) Hardship Withdrawal Taxed?

Hardship withdrawals are taxable events. Thus, your 401(k) plan administrator will withhold a mandatory 20% from the amount requested, although you may end up owing more depending on your income level.

The Bottom Line

A hardship withdrawal from your 401(k) can allow you to quickly access funds in the case of an extreme financial emergency. However, it should be used only as a last resort, as you will have to pay tax on the amount you withdraw and will lose ground on your retirement savings.

About two-thirds of 401(k)s also permit non-hardship in-service withdrawals. This option, however, does not immediately provide funds for a pressing need. Instead, the withdrawal is allowed to transfer funds to another investment option. Consult a tax or financial advisor to explore your options if you're considering any kind of withdrawal or loan from your retirement savings plan.

1. Internal Revenue Service. "Retirement Topics - Hardship Distributions."
2. Internal Revenue Service. "401(k) Resource Guide - Plan Participants - General Distribution Rules."
3. Internal Revenue Service. "Retirement Plans FAQs Regarding Hardship Distributions."
4. U.S. Congress. "H.R.1892 - Bipartisan Budget Act of 2018."
5. Internal Revenue Service. "Retirement Topics: Exceptions to Tax on Early Distributions."
6. FINRA. "401(k) Loans, Hardship Withdrawals and Other Important Considerations."

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