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Withdrawing Money From Your 401(k) Plan As a Hardship Distribution

Updated: 11/13/2008
Article ID: 6399

If you contribute to a company 401(k) retirement plan, generally you can not withdraw money from your account before you reach age 59 ½.

However, your plan may let you withdraw money outright for certain financial and medical hardships, although it is not required to do so.

Taxes and penalties apply

Getting a hardship distribution means that you are allowed to withdraw the money before age 59 ½. It does NOT mean that taxes and penalties are waived. The IRS considers your withdrawal an "early distribution" and imposes taxes and penalties.

For example, a taxpayer in the 28 percent tax bracket who withdraws $30,000 to cover a hardship would owe $8,400 in taxes, plus a $3,000 early withdrawal penalty. (Taxes are owed because retirement plan contributions are made with pre-tax dollars. And almost all states will apply taxes as well.)

Don’t confuse hardship distributions with 401(k) loans, which must be repaid in five years.

Which hardships qualify

You can take a 401(k) hardship distribution if you have what the IRS calls “an immediate and heavy financial need.”

 Depending on your plan’s rules, the following needs could qualify:
  • Payment needed to prevent eviction from, or foreclosure on, your principal residence.
  • Certain medical expenses
  • Burial or funeral expenses
  • Cost of repairing damage to your principal residence
  • Cost of purchasing your principal residence
  • Tuition and related educational fees and expenses

Keep in mind

Your hardship can be considered immediate and heavy even if it was foreseeable or voluntary.

But, your need is NOT regarded as necessary if you or family members have other financial resources.

How much can you withdraw?

Your hardship distribution can not exceed the amount you need, but it can include the money you need to pay any taxes and any penalties that result from the distribution.

Generally, the withdrawal can’t be greater than the contributions you have made to the plan and can’t include the account’s earnings. However, the withdrawal can include regular matching contributions and profit-sharing contributions, if your plan allows.  

What about retirement plans other than 401(k)s?

Similar hardship withdrawals can be made from 403 (b) and 457(b) retirement savings plans, but the rules are determined by each individual employer plan.
 

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