Taking out a hardship withdrawal from 401k

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6 min read Published December 07, 2022

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Written by

Brian Baker

Written by Brian BakerArrow RightInvesting reporter

Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can plan for their financial futures.

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Brian Baker

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Brian Beers

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Kenneth Chavis IV

Reviewed by Kenneth Chavis IVArrow RightSenior wealth manager, LourdMurray

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Funding a 401(k) account is pretty easy: You just set it and forget it. Contribute a modest percentage of each paycheck and your investments build in value over the years, generating a nice nest egg for your retirement.

Getting money out of a 401(k) before retirement is a lot more challenging. But financial emergencies can strike at any moment, and you may feel the need to access the funds in your account. That’s why some 401(k) plans allow hardship withdrawals.

What Is a 401(k) Hardship Withdrawal?

There are special circumstances when you can make hardship withdrawals from your 401(k) account. These include paying for medical care, covering funeral expenses for your spouse or child, or even purchasing a home.

A 401(k) hardship withdrawal can provide you with cash when you’re in a bind. Just keep in mind that you still owe income taxes on any distribution—and if you withdraw money from your 401(k) before age 59 ½, the IRS may charge a 10% early distribution penalty on the amount you take out.

Hardship withdrawals are not a widely used resource. Approximately 34% of American workers between the ages of 15 and 64 have a 401(k). But according to an Investment Company Institute survey, just 2.1% of plan participants have utilized a hardship withdrawal in 2021.

401(k) Hardship Withdrawal Rules

There are strict rules dictating the specific circumstances under which you can make use of 401(k) hardship withdrawals.

Eligibility

To qualify for a 401(k) hardship withdrawal, you must have a 401(k) plan that permits hardship withdrawals. Employers are not required to allow hardship withdrawals, so access can vary from plan to plan. Contact your plan administrator to see if your plan permits hardship withdrawals.

The IRS also says that hardship withdrawals are only an option if you can’t reasonably get money from another source.

Employers can request a written statement from employees certifying that they can’t pay for financial hardship from other resources, including insurance, liquidation of assets, salary, plan loans, or commercial loans.

Permitted Uses for Hardship Withdrawals

Hardship withdrawals are allowed in a limited set of circumstances. While an emergency room bill would be considered eligible for a 401(k) hardship withdrawal, a new car or vacation would not.

The IRS permits 401(k) hardship withdrawals only for “immediate and heavy” financial needs. According to the IRS, the withdrawals that qualify include:

• Health care expenses for you, your spouse or a dependent
• Purchase of a principal residence
• Tuition and room and board for yourself, your spouse or a dependent
• Payments to prevent eviction
• Funeral expenses for your spouse or a dependent
• Repairs to your principal residence
• Expenses resulting from a declared disaster

Limits

There are limits on how much money you can take from your 401(k) account in a hardship withdrawal. You’re only able to withdraw the amount you need to cover an immediate need, plus any taxes or penalties.

Tax Treatment

Any hardship withdrawal is considered to be taxable income for the year it’s taken. A distribution could push you into a higher income tax bracket, causing you to pay a higher marginal tax rate.

In addition to owing regular income taxes on 401(k) hardship withdrawals, you may also have to pay an additional 10% early distribution tax if you’re younger than 59½. However, there are some exceptions to the early distribution tax rule that include:

• The plan owner dies or becomes totally and permanently disabled.
• The withdrawal is used to pay for unreimbursed medical expenses (if the amount exceeds a percentage of your adjusted gross income).

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, the government waived early withdrawal penalties for distributions up to $100,000 from retirement plans that were used to pay for expenses related to qualified, federally-declared disasters.

Alternatives to a 401(k) Hardship Withdrawal

While a 401(k) hardship withdrawal can be helpful if you’re facing a crisis, it should only be used as a last resort.

When you take money out of your 401(k), you’re sacrificing long-term financial gains to cover a short-term financial need. If possible, exhaust other options before considering a hardship withdrawal to protect your retirement savings.

Some alternatives to 401(k) hardship withdrawals include:

401(k) Loan

If your employer allows it, you may be eligible for a 401(k) loan.

A 401(k) loan allows you to borrow $50,000 or half the vested amount from your retirement plan, whichever amount is less. You repay the loan with interest, typically over a five-year term.

If you leave the company before the term is up, you have to repay the full outstanding balance or it’s counted as an early distribution, and subject to income taxes and penalties.

Roth IRA Withdrawal

A Roth individual retirement account (IRA) can be an invaluable resource if you’re facing emergency expenses. Since contributions to a Roth IRA are made with after-tax dollars, you can withdraw money without paying taxes or penalties.

Personal Loan

Before withdrawing money from your retirement account, consider taking out a personal loan.

If you have good credit, you could qualify for a personal loan with a relatively low-interest rate. Some personal loan lenders have rates as low as 5.4%.

The loans are unsecured, so you don’t have to worry about collateral, and you can repay your loan over several years.

Financial Aid

If you’re considering using a 401(k) hardship withdrawal to cover tuition or other expenses for yourself or your child, make sure you explore all the financial aid opportunities available.

Depending on your situation, you may be eligible for additional scholarships, grants, or student loans. To get the maximum amount of aid available, follow these steps:

• Complete the Free Application for Federal Student Aid (FAFSA) to qualify for federal aid.
• Contact your state education agency to see what assistance is available, such as state-based grants.
• Talk to the college financial aid office to find out if you’re eligible for institutional grants or loans.

Low-Interest Credit Card

For individuals with very good credit, a credit card with a 0% APR offer could be a useful alternative to 401(k) hardship withdrawals. Cards with promotional offers usually charge 0% APR for the duration of the introductory period—often six to 18 months in duration. After that, the regular APR applies.

A low-interest credit card can give you time to pay off the emergency expense without interest accruing, and you wouldn’t have to drain your retirement fund. However, make sure you pay off your balance in full by the end of the promotional period; otherwise, hefty interest charges will apply.