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.

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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 01(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

What qualifies as a 401(k) hardship withdrawal?

The IRS states that in order to qualify for a 401(k) hardship withdrawal, you must have an "immediate and heavy financial need." Qualifying expenses for yourself, a spouse, or a dependent include the purchase or repair of a primary residence, money to prevent eviction/foreclosure, healthcare costs, 12 months' worth of tuition/ educational expenses, and funeral/burial expenses.

The 401(k) plan's policy must also permit hardship withdrawals, and be approved by the employer or plan sponsor.

Do you have to show proof of hardship for a withdrawal?

You may need to show proof of the hardship event, your finances, and your insurance policy to qualify for a 401(k) hardship withdrawal. In 2022, the SECURE 2.0 Act allowed employees to self-certify 401(k) hardship withdrawals instead of employers. But employers must approve this process first.

Is it bad to take a hardship withdrawal from a 401(k)?

While taking a hardship withdrawal from a 401(k) may help in emergency situations, it can have dire consequences down the road. Funds in retirement savings accounts accumulate compounded interest over time, and withdrawing funds hurts your overall growth potential. If possible, it's best to leave the money in your 401(k) alone.

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.

Tessa Campbell

Junior Investing Reporter

Tessa Campbell is a Junior Investing Reporter for Personal Finance Insider. She reports on investing-related topics like cryptocurrency, the stock market, and retirement savings accounts. She originally joined the PFI team as a Personal Finance Reviews Fellow in 2022. Her love of books, research, crochet, and coffee enriches her day-to-day life.

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


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

What qualifies for a hardship withdrawal from 401k? ›

There are special circ*mstances 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.

What are the safe harbor reasons for a hardship withdrawal? ›

Under a “safe harbor” in IRS regulations, an employee is automatically considered to have an immediate and heavy financial need if the distribution is for any of these: Medical care expenses for the employee, the employee's spouse, dependents or beneficiary.

Do you have to prove hardship for 401k withdrawal? ›

It used to be the case that employees had to provide their employers with proof of their financial hardships before they could take hardship withdrawals. The IRS no longer requires employers to have that documentation but does advise that employees keep it in case they are audited.

Is there a limit on 401k hardship withdrawals? ›

Hardship withdrawal limits

At a maximum, you can only withdraw enough to cover the cost of the immediate and heavy need, plus the taxes and penalties on the amount. Some plans may also have minimum withdrawal amounts. You also might be limited by how much you have in your 401(k).

Do you need a reason for a hardship withdrawal? ›

A 401(k) hardship withdrawal is allowed by the IRS if you have an "immediate and heavy financial need." The IRS lists the following as situations that might qualify for a 401(k) hardship withdrawal: Certain medical expenses. Burial or funeral costs. Costs related to purchasing a principal residence.

Do hardship withdrawals get denied? ›

The legally permissible reasons for taking a hardship withdrawal are very limited. And, your plan is not required to approve your request even if you have an IRS-approved reason. The IRS allows hardship withdrawals for only the following reasons: Unreimbursed medical expenses for you, your spouse, or dependents.

What are the new hardship withdrawal rules? ›

Under the new rules related to the SECURE 2.0 Act of 2022, employees may state they had emergency expenses that merit a hardship withdrawal. Beginning in 2024, they can take up to $1,000 per year for emergency expenses without incurring the usual 10% early withdrawal penalty.

Can you do a hardship withdrawal to pay off debt? ›

Know How a Hardship Withdrawal Works

In some cases, you might be able to withdraw funds from a 401(k) to pay off debt without incurring extra fees. This is true if you qualify as having an “immediate and heavy financial need,” and meet IRS criteria. In those circ*mstances, you could take a hardship withdrawal.

What qualifies as a financial hardship? ›

The IRS may agree that you have a financial hardship (economic hardship) if you can show that you cannot pay or can barely pay your basic living expenses. For the IRS to determine you are in a hardship situation, the IRS will use its collection financial standards to determine allowable basic living expenses.

What documentation is acceptable for hardship withdrawal? ›

Documentation of the hardship application or request including your review and/or approval of the request. Financial information or documentation that substantiates the employee's immediate and heavy financial need. This may include insurance bills, escrow paperwork, funeral expenses, bank statements, etc.

Can a 401k withdrawal be denied? ›

If the funds in your account aren't yet fully vested.

Employers may also deny withdrawal requests if they suspect a violation of plan rules or IRS regulations.

Is it better to do a hardship or withdrawal from 401k? ›

Two viable options include 401(k) loans and hardship withdrawals. A 401(k) loan is generally more attainable than a hardship withdrawal, but the latter can come in handy during times of financial strife. A financial advisor could help you put a financial plan together for your retirement needs and goals.

What are the pros and cons of hardship withdrawals? ›

Pros: You're not required to pay back withdrawals and 401(k) assets. Cons: If you take a hardship withdrawal, you won't get the full amount, because (a) only contributions can be withdrawn, not earnings, and (b) withdrawals from 401(k) accounts are generally taxed as ordinary income.

Are hardship withdrawals hard to get? ›

Hardship Basics

A hardship withdrawal is not like a plan loan. The withdrawal may be difficult to get, and costly if you receive it. Remember, your 401k is meant to provide retirement income. It should be a last-resort source of cash for expenses before then.

What is an example of a hardship withdrawal? ›

For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse's, your dependents' or your primary plan beneficiary's: medical expenses, funeral expenses, or. tuition and related educational expenses.

What is considered financial hardship? ›

You are in financial hardship if you have difficulty paying your bills and repayments on your loans and debts when they are due.

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