When a 401(k) Hardship Withdrawal Makes Sense

  TYPE OF WITHDRAWAL   10% PENALTY?
Medical expenses No (if expenses exceed 10% of AGI)
Permanent disability No
Substantial equal periodic payments (SEPP) No
Separation of service No
Purchase of principal residence Yes
Tuition and educational expenses Yes
Prevention of eviction or foreclosure Yes
Burial or funeral expenses Yes

A 401(k) hardship withdrawal isn’t the same as a 401(k) loan. A loan means you are borrowing money from the account and must repay it. Hardship withdrawals usually do not allow the money you withdraw to be paid back into the account. You will be able to keep contributing new funds to the account, however.

The Bipartisan Budget Act of 2018 made it easier in some ways to take hardship withdrawals from a 401(k) or 403(b) plan. For example, it eliminated the requirement to take a plan loan before you become eligible for a hardship distribution.

Although a hardship withdrawal might be eligible to avoid the 10% penalty, it still incurs income taxes on the sum you withdraw.

How to Make a 401(k) Hardship Withdrawal

To make a 401(k) hardship withdrawal, you will need to contact your employer and plan administrator and request the withdrawal. The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction. The administrator will also review your request to ensure it meets the criteria for a hardship withdrawal. If the request is approved, the administrator will process the withdrawal and release the funds to you.

It is important to carefully review the terms of your 401(k) plan and consult with your plan administrator to understand the process for making a hardship withdrawal and any potential consequences. It may also be best to exhaust other options, such as an emergency fund or outside investments, before considering a hardship withdrawal from your 401(k) plan.

The conditions under which hardship withdrawals can be made from a 401(k) plan are determined by the provisions in the plan document, which are elected by the employer. For example, your employer may limit the uses of such distributions, such as for medical or funeral costs, as well as require you to provide documentation. Speak to a human resources representative at your workplace to find out the specifics of the plan.

You may want to ask the plan administrator or the employer for a copy of the summary plan description (SPD). The SPD will include information about when and under what circumstances withdrawals can be made from your 401(k) account. You can also ask to be provided with an explanation in writing.

Paying Medical Bills

Plan participants can draw on their 401(k) balance to pay for medical expenses that their health insurance does not cover. If the unreimbursed bills exceed 10% of your adjusted gross income (AGI), the 10% tax penalty is waived.

To avoid the fee, the hardship withdrawal must take place in the same year that you received medical treatment. 

Thanks to the passage of the SECURE 2.0 Act of 2022, plan participants can withdraw $1,000 a year for emergency personal or family expenses without paying the 10% penalty.

Living With a Disability

If you become “totally and permanently” disabled, getting access to your retirement account early becomes easier. In this case, the government allows you to withdraw funds before age 59½ without penalty. Be prepared to prove that you’re truly unable to work. Disability payments from either Social Security or an insurance carrier usually suffice, though a doctor’s confirmation of your disability may be required as well. 

Keep in mind that if you are permanently disabled, you may need your 401(k) even more than most investors. Therefore, tapping your account should be a last resort, even if you lose the ability to work.

Penalties for Home and Tuition Withdrawals

Under U.S. tax law, there are several other scenarios where an employer has a right, but not an obligation, to allow hardship withdrawals. These include the purchase of a principal residence, payment of tuition and other educational expenses, prevention of an eviction or foreclosure, and funeral costs.

However, in each of these situations, even if the employer does allow the withdrawal, the 401(k) participant who hasn’t reached age 59½ will be stuck with a sizable 10% penalty on top of paying ordinary taxes on any income. Generally, you’ll want to exhaust all other options before taking that kind of hit.

For education expenses, a subsidized student loan may be a better long-term financial choice than withdrawing money from a retirement account.

SEPPs When You Leave an Employer

If you’ve left your employer, the IRS allows you to receive substantially equal periodic payments (SEPPs) penalty-free, although they’re technically not hardship distributions. One important caveat is that you make these regular withdrawals for at least five years or until you reach 59½, whichever is longer. That means that if you started receiving payments at age 58, you’d have to continue doing so until you hit 63.

As such, this isn’t an ideal strategy for meeting a short-term financial need. If you cancel the payments before five years, all penalties that were previously waived will then be due to the IRS.

There are three different methods you can choose for calculating the value of your withdrawals:

  1. Fixed amortization: a fixed schedule of payment
  2. Fixed annuitization: a sum based on annuity or life expectancy
  3. Required minimum distribution (RMD): based on the account’s fair market value

A financial advisor can help you determine which method is most appropriate for your needs. Regardless of which method you use, you’re responsible for paying taxes on any income, whether interest or capital gains, in the year of the withdrawal.

Separation of Service

Those who retired or lost their job in the year they turned 55 or later have yet another way to pull money from their employer-sponsored plan. Under a provision known as “separation from service,” you can take an early distribution without worrying about a penalty. However, as with other withdrawals, you will have to pay income taxes on the distributions.

If you have a Roth 401(k), you won’t owe taxes because you contributed to the plan with post-tax dollars.

Alternative: 401(k) Loan

If your employer offers 401(k) loans—which differ from hardship withdrawals—borrowing from your own assets may be a better way to go. Under IRS 401(k) loan guidelines, savers can take out up to either 50% of their vested balance or $50,000, whichever is less. Taking a loan has several advantages over a hardship withdrawal; you won’t have to pay income taxes on the amount that same year, and you won’t incur an early withdrawal penalty.

Be aware, however, that you have to repay the loan, along with interest, within five years. (If you use the funds to purchase a home, you’ll have longer). If you and your employer part ways, you have until October of the following year—the extended tax deadline—to repay the loan.

Do You Have to Pay Back a Hardship Withdrawal from a 401(k)?

Qualified hardship withdrawals from a 401(k) cannot be repaid. However, you must pay any deferred taxes due on the amount of the withdrawal. You may also be subject to an early withdrawal penalty if the hardship withdrawal is not deemed qualified or if you withdraw more than needed to exactly cover the specific hardship.

What Proof Do You Need for a Hardship Withdrawal?

You must provide adequate documentation as proof of your hardship withdrawal. Depending on the circumstance, this can include invoices from a funeral home or university, insurance or hospital bills, bank statements, and escrow payments. These are necessary for tax purposes, and you don’t usually have to disclose these to your employer or plan sponsor.

How Long Does It Take Until I Receive Funds from a Hardship Withdrawal?

A hardship withdrawal will usually take seven to 10 business days, which also includes the time needed to review your withdrawal application.

What Are Hardship Withdrawal Limits?

The IRS sets general guidelines for hardship withdrawals, but the specific limits and conditions are determined by the provisions in each individual 401(k) plan. In general, a 401(k) hardship withdrawal allows you to access your salary deferral contributions (the amounts withheld from paychecks) and, in some cases, the employer’s matching contributions. The exact amount that can be withdrawn will depend on the plan’s rules. For example, some plans may limit the amount that can be withdrawn or require the individual to take a loan from the plan before becoming eligible for a hardship withdrawal.

What Are the Alternatives to a 401(k)?

There are several alternatives to a 401(k). First, consider a solo 401(k)—it’s very similar to the workplace plan. You could also open an individual retirement account (IRA), of which there are several types, including traditional and Roth. You might look at an annuity, though these insurance contracts are complex and often come with high fees. Or if none of that appeals to you, you could simply open a taxable brokerage account. It will lack the tax advantages of the other options, however.

The Bottom Line

If you absolutely need to use your retirement savings before age 59½, 401(k) loans are ordinarily the first method to pursue. But if borrowing isn’t an option—not every plan allows it—a hardship withdrawal may be the right choice if you have carefully considered the implications. One big downside is that you can’t pay the withdrawn money back into your plan, which can permanently hurt your retirement savings. As such, a hardship withdrawal should only be done as a last resort.

Examine your workplace 401(k) plan, and take note of which situations would be subject to a 10% penalty and which won’t. This may make the difference between a hardship withdrawal being a smart way to get cash or a painful blow to your retirement nest egg.


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