When a 401(k) Hardship Withdrawal Makes Sense

If you are facing an extreme financial emergency, you have the option to take money from your 401(k) retirement savings account to help. However, this should only be used as a last resort. Many workers count on their 401(k)s for the lion’s share of their retirement savings. That's why these employer-sponsored plans shouldn't be the first place you go if you need to make a major expenditure or are having trouble keeping up with your bills.

But if better options are exhausted, such as an emergency fund, a 401(k) hardship withdrawal may be worth considering. In some instances, you won't have to pay an early withdrawal penalty—for example, if you become permanently disabled.

What Is a 401(k) Hardship Withdrawal?

A hardship withdrawal, or hardship distribution, is an emergency removal of funds from a retirement plan, sought in response to what the IRS terms "an immediate and heavy financial need." Though the IRS allows for hardship withdrawals generally, it's up to the individual plan administrator whether to allow such withdrawals or not. Many—though not all—major employers do this, provided that employees meet specific guidelines and present evidence of the hardship to them.

Hardship withdrawals are permissible in specific circumstances including the following:

• Medical costs not covered by insurance
• Purchase of a principal residence
• Post-secondary education
• Preventing the foreclosure of a principal residence or eviction
• Funeral or burial expense
• Repairs to a principal residence due to a casualty loss that would have been tax-deductible under Section 165 of the Internal Revenue Code (from 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) declares such losses are not tax-deductible except in specified federal disaster areas)
• Total and permanent disability

According to IRS rules, in some instances a hardship withdrawal lets you pull money out of the account without paying the usual 10% early withdrawal penalty charged if you are under age 59½. The table below summarizes when you owe a penalty and when you do not:

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 withdrawal 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.

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.

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. 

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.

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.

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.

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.