401(k) hardship withdrawals: Rules, limits, and eligible reasons (2024)

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• A 401(k) hardship withdrawal is a penalty-free way to withdraw funds from your retirement account in the event of an emergency.
• The IRS states that you can qualify for a hardship withdrawal with an "immediate and heavy financial need."
• There are still risks involved with 401(k) hardship withdrawals, so you'll probably only want to withdraw if absolutely necessary.

If you've fallen on tough times and are short on cash, a 401(k) hardship withdrawal may be your saving grace. Unlike with standard 401(k) early withdrawals, you're less likely to be charged a penalty fee. And unlike a personal loan, you won't have to pay back any money.

That said, 401(k) hardship withdrawals are managed by the IRS and have strict rules and regulations. The IRS will only waive the penalty charge for unexpected, immediate financial expenses that aren't covered by insurance.

Here's everything you need to know about hardship withdrawals from a 401(k).

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What is a hardship withdrawal from a 401(k)?

A 401(k) hardship withdrawal is a penalty-free way to withdraw funds from your 401(k) retirement savings account in the event of "immediate and heavy financial need," as stated by the IRS. Unlike a personal loan or 401(k) loan, you won't need to repay the funds.

People faced with large, unexpected expenses — such as medical bills, a possible foreclosure or eviction, or expenses resulting from a natural disaster — can use the money from an existing 401(k) account as a last resort. But you'll still be responsible for certain tax obligations, as well as additional consequences.

While this may sound tempting, only folks eligible for a hardship withdrawal can qualify for this emergency financial assistance. Otherwise, withdrawals from retirement accounts before the account owner reaches age 59 1/2 are charged a 10% penalty fee.

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How to apply for a 401(k) hardship withdrawal

You may be able to apply online or in person for a 401(k) hardship withdrawal through your 401(k) plan sponsor — such as Vanguard or Fidelity — or your employer. While the IRS manages the policies and rules around hardship withdrawals, individual plan sponsors/employers have their own policies. If your plan permits hardship withdrawals, your request can be approved by a representative or by a committee who will then take legal responsibility for the 401(k) withdrawal.

The 2022 SECURE 2.0 Act now also permits self-certification permits for hardship withdrawals from employees. But not all employers have integrated this system.

You should also keep in mind that, although the IRS is not the one approving hardship withdrawals from 401(k)s, you can still be audited by the IRS. So make sure all your ducks are in a row if you are permitted a 401(k) hardship withdrawal.

401(k) hardship withdrawal reasons

The IRS specifies that you can only withdraw funds from your 401(k) with no penalty for the qualifying reasons:

• To purchase a principal residence
• To repair a principal residence in the event of losses from floods, fires, or earthquakes
• To prevent eviction or foreclosure
• To cover medical care expenses for yourself, a spouse, or a dependent
• To pay for tuition and other educational expenses for yourself, a spouse, or a dependent (up to 12 months' worth)
• To pay for funeral or burial expenses for a spouse or dependent

It's highly unlikely that you'll receive permission to withdraw funds to pay for expenses like a vacation, new car, or wedding.

401(k) hardship withdrawal rules

Qualifying for a 401(k) hardship withdrawal can be difficult, as the rules are generally strict. Just because you can technically pull from your 401(k) doesn't mean you should. 401(k)s are retirement savings accounts, designed for long-term growth, and usually aren't meant to be touched until you're at least 59 1/2.

Who is eligible for a 401(k) hardship withdrawal?

First things first: To be eligible for a 401(k) hardship withdrawal, you have to have an existing 401(k) plan. Moreover, that plan has to permit hardship withdrawals. Not all 401(k) plans are designed with the same rules and limitations, so make sure to read your 401(k) individual plan's policy. You can also reach out to your plan's administrator for assistance.

You also may not qualify if your emergency expenses can be technically covered by your insurance or another policy. But at the end of the day, your 401(k) plan sponsor or employer has to be on board with a hardship withdrawal.

401(k) hardship withdrawal limits

You can only withdraw the necessary amount to cover the cost of the hardship, such as the cost of emergency surgery or the amount needed to prevent the foreclosure of a home (plus the cost of tax and any penalty fees). You should be able to withdraw money you have personally contributed to the account, and policy permitting, you may also be allowed to withdraw your employer's matching contributions and any investment earnings.

However, you won't be able to withdraw more than financially necessary to cover the cost of immediate and heavy finical needs. Withdrawals outside of a hardship withdrawal are then subject to a 10% penalty fee on the amount withdrawn.

Lying to get a 401(k) hardship withdrawal

You shouldn't lie to get a hardship withdrawal. Lying to get a 401(k) hardship withdrawal can have serious consequences, such as legal repercussions in the form of fraud, financial penalties, and tax implications. If you're caught lying about legibility for a hardship withdrawal, you may face additional fees, fines, and even imprisonment.

401(k) plans are employee-sponsored plans, and lying about your financial situation in a legal declaration may result in a loss of trust from your employer. This could hurt your chances for promotions or may even cost you your job.

Disadvantages of 401(k) hardship withdrawals

While a hardship withdrawal may provide immediate relief, it can be a major setback to your retirement savings. 401(k)s are retirement accounts designed to accumulate interest over a longer period of time, while also investing funds in a diverse portfolio of assets for wealth-building purposes. Removing funds from a 401(k) not only depletes your retirement savings but also stops your money from continuing to earn interest.

Depending on how much you need to retire, this could significantly affect your retirement planning goals.

There are also tax obligations involved with 401(k) hardship withdrawals that you should consider before taking out money. 401(k)s are tax-advantage plans, but you may have to forfeit your tax advantages if you withdraw early. Hardship withdrawals are considered taxable income, which may place you in a higher income tax bracket.

The 401(k) administrator may also withhold at least 20% of the requested amount from your 401(k) for tax purposes. the amount withheld varies by income.

401(k) hardship withdrawal FAQs

Is a 401(k) hardship withdrawal worth it?

Regardless, retirement plans, like 401(k)s, are best for long-term growth and tax advantages. Withdrawing from your 401(k) plan, even as a hardship withdrawal, can have long-term consequences that significantly affect your retirement savings down the line.

If you're able, consider taking out a personal loan or 401(k) loan, or applying for financial aid before pulling from your retirement savings account. While these alternatives also come with consequences, such as interest, they may be more sustainable options in the long run.

You can reach out to a financial advisor or certified financial planner (CFP) for help with creating a financial plan and talking about retirement savings.