- If possible, consider other options before resorting to a hardship withdrawal.
- Find out if your plan allows hardship withdrawals and if your situation qualifies.
- After the dust settles, make a plan for getting your savings back on track.
When it rains, it pours—and sometimes the only umbrella available is in your 401(k). Having the option to take a hardship withdrawal from your retirement account can be a financial lifesaver when you have nowhere else to turn for cash.
But before you take a hardship withdrawal from your 401(k), evaluate all your options carefully. If you really have to do it, take steps to help reduce the damage to your retirement savings, and make a plan to get your finances back on track.
Do you qualify for a hardship withdrawal?
There may be a few hurdles to cross before you can take a hardship withdrawal. First, your plan has to allow them—not all do. If your plan does, many companies require that you take a loan from your 401(k) first. A loan from your 401(k) will let you pay the money back to your account with interest.
Read Viewpoints on Fidelity.com: Things to know before taking a 401(k) loan.
A hardship withdrawal from your 401(k) may be available for certain circumstances. Unfortunately, it is an expensive way to tap your own money. Taxes may be due on the money withdrawn and if you’re under age 59½, there may be a 10% penalty as well. Plus you may lose some of the long-term benefits of tax-advantaged compounding—and that could reduce the money you will have available in retirement. Unlike taking a loan from your 401(k), you can't repay a hardship withdrawal. You may even be required to wait 6 months following the withdrawal before you can begin contributing to the account again. The suspension also applies to any other qualified, nonqualified, and stock plans of all related employers.
For those plans that allow them, the IRS considers hardship withdrawals allowable when there is a heavy and immediate financial need—and requires that only the amount necessary to satisfy the need is taken out of the account.
What's not included
Things like vacations, boats, or new televisions are not considered heavy and immediate financial needs.
What is included
Generally, these situations qualify for hardship withdrawals:1
- Unreimbursed medical bills
- Buying a home
- Paying college expenses—or other college-level education costs
- Funeral expenses
- Payments necessary to prevent eviction from or foreclosure on your home
- Repairing damage to a home located in a federally declared disaster area
Your plan administrator may require some documentation showing that you have no other options and verifying the amount needed.
The penalty can be expensive
If you are under age 59½, the distribution from your account will probably be subject to a 10% penalty, and is generally considered taxable income for state and federal tax purposes—which means it will be taxed at your ordinary income rate. There are some circumstances that qualify for a penalty-free withdrawal, however, including disability and unreimbursed medical bills greater than 7.5% of adjusted gross income.
- Visit IRS.gov to find out more about exceptions to the 10% penalty.
Taxes and opportunity costs
Taxes can take a big bite out of early withdrawals. Someone in the 24% tax bracket in 2018 may potentially owe the IRS 34% of the amount of the withdrawal when the 10% penalty is added on. So, for example, in order to get $10,000 in your pocket, you'd have to take out $13,400 to cover taxes and penalties—if your plan allows you to take additional money to pay for taxes. Not every plan will allow that, so you may need to have another source of funds to cover the tax liability. Check with your plan administrator to understand what is allowed under your plan.
But taxes and penalties are only the immediate costs. The opportunity costs from lost investment returns on that withdrawal can add up over time.
Read Viewpoints on Fidelity.com: Beware of cashing out your 401(k).
It goes without saying but we have to say it: Taking money from your 401(k) should be a last resort, reserved for a serious emergency. Before you do, consider these alternatives.
Consider a 401(k) loan
In some cases, you have to take a loan from your 401(k) before you can take a hardship withdrawal. In other cases, it's an option. Either way, a 401(k) loan could be a better, though still costly, option than a hardship withdrawal, as you will pay the money back to yourself with interest.
Think about a distribution from a traditional or Roth IRA instead
If you have money in an IRA, you may have a little more flexibility with an IRA than with a 401(k).
Contributions to a Roth IRA can be withdrawn any time, tax and penalty free, though distributions of earnings are subject to a potential 10% penalty.2 A limited number of circumstances qualify for a penalty-free distribution from either a Roth IRA or a traditional IRA. Among them are first-time home purchases—or if it's been 2 years since you owned a principal residence, even if it's not your first home. Qualified education expenses and disability may also be eligible for penalty-free withdrawals.
Even though it may be easier to withdraw from an IRA than a 401(k), any withdrawals will lose the benefits of tax-advantaged compounding over time.
How to recover
Most everyone experiences setbacks—but the right response to these setbacks can help you achieve your financial goals. If you do find yourself in a situation where you have to take money out of your 401(k), don't despair or give up. Get yourself back on track by building a solid emergency fund to help ensure that you're covered for unforeseen expenses. We suggest saving at least 3 to 6 months' worth of essential expenses in your rainy-day fund. It's a lot of money to consider saving—but consistently putting away just a small amount can help you get there.
To find money to save, take a look at your spending. There could be a lot of fat to cut out of your budget. No one enjoys a spending diet, but temporarily slashing spending could help.
Read Viewpoints on Fidelity.com: How to save for an emergency.
As soon as you're able, start contributing again as much as you can to your retirement account so that even if it's a small amount. Work toward bumping up that contribution when you can.
The important things are to have a plan and to keep saving for retirement—you'll eventually get back on solid financial footing.
Next steps to consider
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This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Investing involves risk, including risk of loss.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
A distribution from a Roth 401(k) is federally tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, or death. State taxes may apply.
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