401(k) hardship withdrawals: What they are and how they work

When you need money for an emergency, you might turn to your savings, a credit card or a loan. If you’ve put money into a 401(k) retirement plan, you might also be able to withdraw some of that money early.

Withdrawing funds from a 401(k) is often a last resort because you may have to pay income taxes on the amount, plus a 10% penalty. You also can’t put the money back into your account, like you can with a 401(k) loan—and you’ll lose out on the potential investment returns that you could use later in life.

Still, it’s worth understanding how 401(k) hardship withdrawals work and how they compare to common alternatives. 

Key takeaways

• A 401(k) hardship withdrawal is an early withdrawal that you might be able to take to cover specific expenses.
• Your 401(k) plan rules will determine if and when you’re allowed to take hardship withdrawals.
• You may have to pay income taxes and a 10% penalty on the amount you withdraw. 

A 401(k) hardship withdrawal, also called a hardship distribution, is a type of early withdrawal from your 401(k)—meaning a withdrawal you make before you turn 59 1/2. These withdrawals must be for specific financial needs. And you’re only allowed to withdraw enough money to pay for the financial need and related taxes.

401(k) plans don’t have to allow hardship withdrawals. If you’ve been saving for retirement and feel like you need some of that money early, you can review your 401(k) plan documents for the option—look over your Summary Plan Description. Or you can ask your plan administrator, which may be a third-party company that helps manage your retirement plan, about your options.

If your plan allows hardship withdrawals, you may need to prove to your employer or self-certify that you meet your plan’s requirements. If your plan doesn’t allow hardship withdrawals, you may still be able to make a non-hardship early withdrawal or take out a 401(k) loan.

The IRS lists seven situations that may qualify for 401(k) hardship withdrawals: 

• Non-mortgage payment costs when you’re buying a home that you’ll use as your principal residence
• Certain expenses to repair your principal residence
• Payments to avoid eviction from or foreclosure on your principal residence 
• Medical expenses 
• Higher education expenses for the next 12 months of postsecondary education
• Funeral expenses 
• Expenses or losses related to a federal disaster declaration if your primary residence or job is in the disaster zone 

Note that some 401(k) plans are more restrictive, and some of the situations outlined above by the IRS may not qualify for hardship withdrawal.

And keep in mind that although you need an “immediate and heavy financial need” to qualify, these don’t have to be unexpected expenses. For example, you might have known you wanted to help your child pay tuition, and now you need to make the payment. However, a consumer purchase generally won’t qualify as it doesn’t fall into one of the categories above.

The IRS sets the high-level guidelines for 401(k) hardship withdrawals, and your specific plan will set the potentially more restrictive criteria you must follow. But here’s an overview of the eligibility, limits and requirements for getting approved for a hardship withdrawal:

Hardship withdrawal eligibility

The general eligibility requirements are that you have a 401(k) plan that allows hardship distributions, and you’re experiencing one of the events listed above. But there could also be additional requirements:

• You might not qualify if you, your spouse or a minor child have other assets that you could use to cover the expense. 
• Some plans may require you to take out a 401(k) loan before getting a hardship withdrawal.

The SECURE 2.0 Act of 2022 also made changes to 401(k) plans and individual retirement accounts (IRAs) that you want to be aware of:

• Starting in 2024, you may be able to withdraw up to $1,000 per year from retirement plans for certain emergencies without paying the 10% penalty. More details might be shared as the option becomes available. 
• Starting in 2024, domestic abuse victims—including those with children or household members who are abused—may be able to withdraw 50% of their account balance, up to $10,000 maximum, without paying a 10% penalty. You can also repay the withdrawn amount into the plan over three years. 

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). Depending on your plan, you might only be able to withdraw money that you contributed—but not your earnings. But some plans might also let you withdraw money that your employer contributed, such as 401(k) matching contributions. 

Hardship withdrawal documentation 

You may need to share proof of the hardship event and show that you don’t have insurance or other assets and can’t qualify for a loan before you receive the hardship withdrawal. Your employer may also want to verify that you can’t cover the hardship by stopping your 401(k) contributions.

Your plan documents and the specific situation may determine the exact documentation required. The SECURE 2.0 Act of 2022 also changed these requirements, and employers can now allow employees to self-certify their eligibility, which might make requesting a hardship withdrawal easier. 

Although a 401(k) hardship withdrawal might give you quick access to the money you’ve saved, there are several downsides to consider: 

• You can’t repay the amount you take out. Unlike with a 401(k) loan, you can’t repay the money that you take out with a 401(k) hardship withdrawal. As a result, you’ll miss out on the potential investment growth that would have come from that money. And while you can make new contributions, there are annual 401(k) contribution limits. 
• The amount could be taxable. Unless you’re taking a distribution from a Roth 401(k), you have to include your withdrawal as taxable income for the year you receive the money. 
• There may be a 10% penalty. The withdrawal could also be subject to a 10% penalty unless you spend the money in a way that qualifies for an exception—such as for medical expenses that exceed 10% of your adjusted gross income. Additionally, people who are terminally ill can now take penalty-free withdrawals from qualified retirement plans.

A hardship withdrawal might not be the only option if you need money—and it isn’t necessarily the best one in some cases. Depending on your plan’s rules, you also might need to try other ways to navigate a financial hardship before turning to a 401(k) hardship withdrawal. These could include:

Non-hardship early 401(k) withdrawals

Your plan might let you take an early 401(k) withdrawal without requiring you to certify or document you qualify for a hardship withdrawal. The same tax and penalty rules apply to these early withdrawals, which could make them an easy alternative.

401(k) loans 

If your plan allows it, you may be able to take out a loan from your 401(k) for up to 50% of your vested balance, with a maximum of $50,000. Or you may be able to borrow more than 50% of your vested balance if the balance is below $10,000.

Unlike with an early withdrawal, you don’t have to pay income taxes or a penalty on the 401(k) loan amount if you follow the required repayment schedule.

Although you’ll pay interest on the loan, your interest payments will also go into your 401(k). If you can’t afford the payments, the loan might be considered an early withdrawal, and the income tax and penalty rules may apply.

Also, if you leave your job, you may have to immediately repay the entire amount or consider the loan an early distribution.

Traditional or Roth IRA withdrawals 

If you have retirement savings in a traditional IRA or Roth IRA, you might be able to take an early withdrawal. As with Roth 401(k) plans, withdrawn contributions aren’t taxable income since you’ve already paid income taxes on that amount.

There could still be a 10% penalty for early withdrawals, but the rules are different from early 401(k) withdrawals—which could make tapping an IRA a better option in some cases. For example, you can use the funds for higher education expenses or to pay for health insurance premiums while unemployed without paying a 10% penalty on the withdrawal.

Low-interest credit card

A low-interest credit card could help you finance certain purchases. Some cards even offer new cardholders an introductory 0% interest rate during a limited promotional period. If you can qualify for a card with one of these offers, you may be able to borrow money and pay off the balance without having to pay any credit card interest.

A loan or line of credit

Depending on your credit and income, you could try to apply for a personal loan, a line of credit or a secured loan, such as a home equity loan. You may have to pay an origination fee or closing cost, plus interest on the amount you borrow. But you can compare these costs to the potential taxes, penalty and lost earnings from a 401(k) hardship withdrawal to see which might cost you more in the long run.

Savings accounts 

Money in an emergency fund or savings account could be a good option if you don’t want to pay any extra fees, taxes or penalties. If you need to cover medical expenses and have a health savings account (HSA), see if your expenses qualify for tax- and penalty-free withdrawals. 

Dealing with financial stress can be difficult, particularly when you’re unsure of how to pay for unexpected emergencies. A 401(k) hardship withdrawal might be an option if your 401(k) plan allows it and you qualify. However, other options may have more favorable tax implications in the near term and leave you with more long-term savings for your retirement.