What’s a 401(k) hardship withdrawal?

Although retirement savings are generally best saved for your later years, some 401(k) plans offer the flexibility to withdraw money early if you’re facing a qualified financial hardship. Here’s an overview of 401(k) hardship withdrawals, including how they work and what qualifies as a hardship.

What is a 401(k) hardship withdrawal?

A 401(k) hardship withdrawal is money you take out of your retirement plan for what the IRS defines as an “immediate and heavy financial need.” Typically, a 401(k) distribution to a saver younger than age 59½ leads to a 10% penalty. If you qualify for a 401(k) hardship withdrawal within the terms of your plan, you avoid that penalty. Although, you'll have to pay income taxes on the money withdrawn.

How does a 401(k) hardship withdrawal work?

To break down how 401(k) hardship withdrawals work, let’s look at the 2 main qualifying rules:

1. You’re facing an immediate and heavy financial need: Your employer determines what qualifies as an immediate and heavy financial need—depending on the plan terms and your specific circumstance—and you may be asked to prove you can’t pay for the expense using your income, savings, nonretirement investments, or insurance.
2. You can withdraw only the amount necessary to cover your financial need. If your circumstance qualifies for a 401(k) hardship withdrawal, you can only withdraw the amount of money needed to cover that expense, plus enough for income taxes on the withdrawal. Certain plans will allow you to remove the principal contributions made to the plan; others may allow for withdrawals of both contributions and earnings.

401(k) hardship withdrawal vs. 401(k) loan

A 401(k) loan lets you borrow money from your retirement savings and pay it back to yourself over time, with interest. The loan payments and interest go back into your account.

Although both the 401(k) loan and hardship withdrawal processes could allow for early distributions, the details differ. With a 401(k) hardship withdrawal, the withdrawal can’t be repaid, and what you withdraw is taxed. Oppositely, 401(k) loans are generally not taxed as long as all requirements are met, and the money removed from the account must be repaid. Whichever way you take money out, just know you will lose retirement savings as a result.

What are the IRS-qualified reasons for taking a 401(k) hardship withdrawal?

The IRS has 7 circumstances that qualify for a 401(k) hardship withdrawal without needing documentation to prove hardship.

1. Medical expenses for you, your spouse, or dependents that are deductible under Code Section 213(d).
2. Costs related to buying your principal residence (mortgage payments generally don’t qualify, unless they’re to avoid foreclosure).
3. Payments necessary to avoid eviction or foreclosure on a mortgage from your principal residence.
4. Expenses to repair damage to your principal residence if it’s a result of a casualty under IRC Section 165.
5. Tuition or other related education costs (like room and board) for the next 12 months of postsecondary education for you, your spouse, or dependents.
6. Funeral expenses for you, your spouse, children, or dependents.
7. Expenses and losses incurred by participants on account of a FEMA-declared disaster, provided the participant’s principal residence or place of employment at the time of the disaster was located in a FEMA-designated area.

Make sure to record all facts, bills, and receipts related to your 401(k) hardship withdrawal.

What can you use a 401(k) hardship withdrawal for?

Your employer and your retirement plan’s terms will dictate what situations qualify for a 401(k) hardship withdrawal. Generally, though, credit card debt or consumer purchases are not qualifying expenses. Contact your plan sponsor to find out about the rules that apply to you.

Is there a penalty for taking a 401(k) hardship withdrawal?

Generally, if your plan allows for hardship withdrawals and your situation falls into one of the 7 categories listed above, you do not have to pay any tax penalties. Typically, there is a 10% penalty for withdrawals if you are under age 59½ unless you qualify within your plan’s terms for a 401(k) hardship withdrawal.

Do you have to pay taxes on a 401(k) hardship withdrawal?

Yes, you have to pay income taxes on 401(k) hardship withdrawals. You are allowed to withdraw enough money to cover both the cost of your financial need and the income taxes on your withdrawal.

Who can take a 401(k) hardship withdrawal?

Although generally only the plan participant can take a 401(k) hardship withdrawal, they may be able to remove money from the account for a qualified financial need for themselves, their spouse, or their dependents. Depending on the type of hardship, you may also be able to take a 401(k) hardship withdrawal for a primary beneficiary on your plan, even if they’re not a dependent or a spouse.

Advantages of 401(k) hardship withdrawals

Here are some of the main advantages of taking a 401(k) hardship distribution if taking out a hardship withdrawal is your only option:

• Potentially no debt in the face of an emergency expense: If you have no other way to pay an emergency expense, money from a 401(k) hardship withdrawal could help keep you out of debt or from going further into debt.
• No obligation to pay back what you removed: Unlike a 401(k) loan, you can’t repay a 401(k) hardship withdrawal.

Disadvantages of 401(k) hardship withdrawals

Although a 401(k) hardship withdrawal may give you access to cash when you’re in a financial pinch, there are some serious downsides to weigh:

• Distributions still subject to income taxes: You’re still on the hook to pay income taxes on the 401(k) hardship distribution. You may want to consult a tax professional to understand your tax liability.
• Loss of retirement savings: Perhaps the biggest downside of a 401(k) hardship withdrawal is the loss of retirement savings. Removing contributions to your retirement plan can reduce your future savings, especially if you remove money early in your career. It’s up to you to weigh whether that loss of retirement savings is worth covering that emergency expense and avoiding debt.

How to get approved for a 401(k) hardship withdrawal

The process for getting approved for a 401(k) hardship withdrawal varies by plan. Some plans may require submitting documentation to share your financial situation and that you are facing a qualified hardship; others may not. In either case, contact your employer’s benefits department to learn how to get approved.

Should you take a 401(k) hardship withdrawal?

There are a lot of factors to consider before taking a 401(k) hardship withdrawal. Primarily, you have to weigh the loss of future retirement savings against covering the costs of the expenses you’re facing now. Because withdrawing from your 401(k) could permanently impact your retirement savings, investigate these other options to help manage the financial hardship you’re facing:

• Tapping into HSA savings, if it’s a qualified medical expense.
• Withdrawing from your emergency savings or other nonretirement savings, such as a checking, savings, or brokerage account.
• Withdrawing from a Roth IRA—contributions (but not earnings) can be withdrawn any time penalty-free.¹
• Using a home equity line of credit or personal loan.

This is not an exhaustive list of alternative options, but all of these could be alternative options to taking a 401(k) hardship withdrawal.

Another alternative to a 401(k) hardship withdrawal to consider: As of 2024, the IRS has added additional withdrawal options that qualify for IRS exemptions, but each one has different rules. For example, some plans allow you to withdraw $1,000 from your 401(k) per year to cover emergency expenses penalty-free. This is separate from a hardship withdrawal, though you’d still be on the hook for income taxes. To do this, you need to certify in writing to your employer that the withdrawal is necessary for an emergency, and you generally can’t take another $1,000 emergency distribution for the next 3 years unless you repay that original withdrawal. 401(k) hardship withdrawals, on the other hand, are typically for expenses larger than $1,000, or if your plan doesn’t allow this type of emergency withdrawal. Depending on your circumstances, and if your plan has added the new withdrawal options, you may have more options than the traditional hardship withdrawal. Make sure to check with your provider or plan sponsor.

How to take a 401(k) withdrawal at Fidelity

If you’ve explored alternatives and decided that a 401(k) hardship withdrawal is your best option, you’ll need to submit a request with your plan sponsor. If your retirement plan is with Fidelity, log in to NetBenefits^®Log In Required to review your withdrawal options.