How Many Times Can You Take a Hardship Withdrawal From a 401k?

A 401(k) hardship withdrawal offers a limited option for accessing retirement funds before traditional retirement age. This distribution is for urgent financial situations where other resources are unavailable. Unlike a 401(k) loan, a hardship withdrawal represents a permanent removal of assets from the retirement plan.

Qualifying for a Hardship Withdrawal

To qualify for a 401(k) hardship withdrawal, an individual must demonstrate an “immediate and heavy financial need” as defined by the Internal Revenue Service (IRS). The amount withdrawn cannot exceed what is necessary to satisfy this financial need, and may include funds to cover taxes or penalties.

The IRS provides “safe harbor” events that are automatically considered an immediate and heavy financial need. These include:
Expenses for medical care for the participant, their spouse, dependents, or primary beneficiary.
Costs directly related to the purchase of a principal residence, excluding mortgage payments.
Tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the participant, spouse, dependents, or primary beneficiary.
Payments necessary to prevent eviction from a principal residence or foreclosure on a mortgage on that residence.
Burial or funeral expenses for the participant, spouse, dependents, or primary beneficiary.
Expenses for the repair of damage to the participant’s principal residence that would qualify for a casualty deduction under Internal Revenue Code Section 165.

Plan administrators may require participants to certify they have insufficient cash or other liquid assets to satisfy the need, indicating other financial resources have been exhausted. The Bipartisan Budget Act of 2018 removed the six-month deferral suspension requirement for withdrawals made after December 31, 2018. This legislation also expanded the sources from which hardship withdrawals could be taken, allowing for earnings on elective deferrals and certain employer contributions to be included.

Limits on Hardship Withdrawals

The IRS does not impose a specific maximum number of hardship withdrawals a participant can take over their lifetime or within a certain period. Each withdrawal must independently satisfy the “immediate and heavy financial need” criteria at the time of the request. Each financial emergency must be distinct and meet the qualifying conditions.

While federal regulations do not cap the number of withdrawals, individual 401(k) plan documents may impose their own, more restrictive rules regarding frequency or available funds. Some plans might limit withdrawals to only employee contributions. It is important to consult the specific plan document to understand any additional limitations.

A hardship withdrawal is a permanent reduction of the 401(k) balance, as funds cannot be repaid to the account. Repeated withdrawals can substantially deplete retirement savings, impacting the remaining balance and its potential for future growth through compounding.

The Hardship Withdrawal Process

Initiating a hardship withdrawal typically begins with contacting the 401(k) plan administrator or the employer’s human resources department. They can provide specific guidance and the necessary application forms. Each plan may have unique requirements for the submission process.

Gathering required documentation is a crucial step to substantiate the immediate and heavy financial need. This documentation can include medical bills, eviction notices, purchase agreements for a principal residence, or invoices for educational expenses. Specific documents needed will vary depending on the nature of the hardship. The participant must then accurately complete the application form, providing all requested information.

Once the application and supporting documentation are prepared, they must be submitted through the method specified by the plan administrator, which could be an online portal, mail, or fax. After submission, individuals should anticipate a processing period, which can vary by plan, typically taking a few weeks. The plan administrator will communicate the status of the request and may ask for additional information. A request might be denied if it does not meet the plan’s or IRS’s criteria; some plans may have an appeal process.

Financial Impact of Hardship Withdrawals

A 401(k) hardship withdrawal has significant financial implications, both immediate and long-term. The withdrawn amount is generally taxable as ordinary income in the year it is received. The distribution is added to the individual’s gross income and taxed at their marginal income tax rate.

In addition to income taxes, an extra 10% early withdrawal penalty applies if the participant is under age 59½. This penalty is imposed by the IRS for early access to retirement funds. Certain exceptions to this 10% penalty may apply, such as distributions for unreimbursed medical expenses, total and permanent disability, or payments made to an alternate payee under a Qualified Domestic Relations Order (QDRO).

The most substantial long-term consequence is the permanent reduction in retirement savings and the loss of future compounded growth. Funds withdrawn early lose the opportunity to grow tax-deferred over time, potentially impacting financial security in retirement. The withdrawal will be reported to the IRS on Form 1099-R, indicating the distribution amount and any taxes withheld. Unlike a 401(k) loan, which is repaid with interest back into the account, a hardship withdrawal is not repaid, making its impact on retirement savings permanent.