A 401(k) hardship withdrawal is a withdrawal from a 401(k) for an “immediate and heavy financial need.” It is an authorized withdrawal—meaning the IRS can waive penalties—but it does not relieve you of your tax responsibilities. But before you tap your retirement savings to cover a large, unexpected expense, check that you’re allowed to do so. The IRS has specific rules for hardship withdrawals, and your plan sponsor may also.
Below, we’ll discuss what you need to know about hardship withdrawals, beginning with what you need to prove to qualify for one.
- A hardship withdrawal from a 401(k) retirement account is for large, unexpected expenses.
- Unlike a 401(k) loan, the funds need not be repaid. But you must pay taxes on the amount of the withdrawal.
- A hardship withdrawal can give you retirement funds penalty-free, but only for specific qualified expenses such as crippling medical bills or the presence of a disability.
Understanding 401(k) Hardship Withdrawals
Even if your employer offers the measure, you should be cautious. Financial advisors typically counsel against raiding your retirement savings except as an absolute last resort. Indeed, some advisors fear that too many people will turn to their retirement funds at the expense of using less financially damaging options.
The Internal Revenue Service (IRS)’s “immediate and heavy financial need” stipulation for a hardship withdrawal applies not only to your situation. You can make these withdrawals to accommodate the need of a spouse, dependent, or beneficiary.
Immediate and heavy expenses include the following:
- Certain expenses to repair casualty losses to a principal residence (such as losses from fires, earthquakes, or floods)
- Expenses to prevent being foreclosed on or evicted
- Home-buying expenses for a principal residence
- Up to 12 months’ worth of tuition and fees
- Burial or funeral expenses
- Certain medical expenses
You won’t qualify for a hardship withdrawal if you have other assets you could draw on or insurance covering the need. However, you needn’t necessarily have taken a loan from your plan before you can file for a hardship withdrawal. That requirement was eliminated in reforms passed in 2018.
It’s important to understand that even though the law states hardship withdrawals are legal, you might not be able to make one. That decision is still up to your employer or plan sponsor. “A retirement plan may, but is not required to, provide for hardship distributions,” the IRS states.
If the plan does allow hardship distributions, it must specify the criteria that define a hardship, such as paying for medical or funeral expenses. Your employer will ask for specific information and possibly documentation of your hardship.
401(k) Hardship Withdrawal Amounts
Hardship withdrawals must be for the amount “necessary to satisfy the financial need.” That sum can, however, include what’s required to pay taxes and penalties on the withdrawal.
The maximum withdrawal can represent a larger proportion of your 401(k) or 403(b) plan. If your employer allows it, you may withdraw its contributions plus any investment earnings in addition to your salary-deferral contributions.
You’ll also be able to keep contributing, which means you’ll lose less ground on saving for retirement and still be eligible to receive your employer’s matching contributions.
How Much Does a 401(k) Hardship Withdrawal Cost You?
Hardship withdrawals hurt you in the long run when saving for retirement. You’re removing money you’ve set aside for your post-pay-check years, losing the opportunity to have it continue appreciating. You’ll also be liable for paying income tax on the withdrawal amount—and at your current rate, which may be higher than if the funds were withdrawn in retirement.
If you’re under 59½, you’ll be subject to the 10% penalty unless you’re receiving the funds under any of the following circumstances:
- A corrective distribution, or money repaid to you as a highly compensated employee deemed to have contributed too much to a 401(k) compared to other employees
- Certain distributions to qualified military reservists called to active duty2
- A qualified domestic relations order, issued as part of a divorce decree)
- Medical expenses in excess of 10% of adjusted gross income (AGI)
- A dividend pass-through from an Employee Stock Ownership Plan
- A series of substantially equal periodic payments
- Employee separation from service after age 55
- Total and permanent disability
- IRS levies on the plan
Other Options for Accessing Your 401(k) Money
If you can wait until you’re at least 59½, you can withdraw funds from your 401(k) without penalty, whether you’re suffering from hardship or not. You might be able to borrow money from 401(k) if your employer or plan sponsor permits it. However, this puts you in another financial bind because you have to repay it within five years.
While you can borrow from your 401(k), it’s worth taking the time to determine how the loan will affect the nest egg you’ve been accumulating for your retirement. However, the loan might be worth considering instead of a withdrawal if you believe there’s a chance you can repay the loan in the allotted time.
Loans are generally permitted for the lesser of half your 401(k) balance or $50,000 and must be repaid with interest. However, the principal and interest payments are made to your retirement account. If you should default on the payments, the loan converts to a withdrawal, with most of the same consequences as if it had originated as one.
How Long Does a 401(k) Hardship Withdrawal Take?
A hardship withdrawal can take 7-10 business days, which includes a review of your withdrawal application.
How Do You Prove Hardship for a 401(k) Withdrawal?
You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship. You will want to keep documentation or bills proving the hardship, however.
How Much Tax Is on a 401(k) Hardship Withdrawal?
Hardship withdrawals are taxable events. Thus, your 401(k) plan administrator will withhold a mandatory 20% from the amount requested—although you may end up owing more depending on your income level.
The Bottom Line
About two-thirds of 401(k)s also permit non-hardship in-service withdrawals. This option, however, does not immediately provide funds for a pressing need. Instead, the withdrawal is allowed to transfer funds to another investment option.
You might want to consult a tax or financial advisor to explore whether this option suits your financial circumstances. Indeed, engaging professional advice to help analyze your options is wise if you’re considering any action to obtain funds from your assets immediately.
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