Sometimes life sends us devastating curveballs with deep financial consequences. If you’ve fallen into dire circumstances, and have already dipped into your savings, there may be hope in your 401k plan. While ordinarily, you cannot withdraw money from your retirement account until your employment ends (or turn 55), many plans allow something called a hardship withdrawal.
What counts as a hardship?
While lots of overwhelming financial situations can arise in life, only specific circumstances can be classified as a hardship. According to the IRS, a hardship must be an “immediate and heavy financial need” and “the [withdrawal] amount must be necessary to satisfy the financial need.” That second part means that there can’t be any other resources used to cover your emergency.
Most plans allow withdrawals for the following:
- Unexpected medical expenses not covered by your insurance (For you, your spouse, or your dependents)
- Purchase of a home (Your principal residence—not a vacation home)
- Tuition and related educational fees
- Preventing eviction or foreclosure
- Funeral or burial expenses
- Repair of major damage your primary home
Every plan is different; so it’s important to check with your employer see if your plan has any additional requirements or restrictions. Your plan administrator may need some documentation along with your request to illustrate your financial need. This will generally involve information about the hardship, verifying how much you need, and proving you’ve exhausted all other options.
After you take a 401k hardship withdrawal
Most plans require the employee to stop contributing to their plan for six months following a hardship distribution. Hardship distributions are taxable and subject to the 10% early withdrawal penalty unless an exception applies.
Do you qualify for a 401k hardship withdrawal?
To find out if your plan allows for a 401k hardship withdrawal you will need to talk to your plan sponsor, which might be someone in the HR department or even the owner of your business. You can also call the phone number on your 401k account statement.
Should I take a 401k loan instead of a 401k hardship withdrawal?
Employees are required to repay these loans, and unlike the hardship withdrawal, they will not be taxed for the loan. One thing to keep in mind about 401k loans is that they are generally recommended as an absolute last resort in comparison to other types of loans. Want to learn more? Check out our post on Is it a Good Idea to take out a 401k loan?
Anything else I should think about?
If you are younger than 59 ½, you’ll owe a 10% early distribution tax, in addition to federal, state, and local taxes if you distribute pre-tax savings.