How Much Can You Withdraw From 401k for Hardship?

A 401(k) hardship withdrawal allows access to retirement funds during significant financial emergencies. It is a last resort due to strict conditions and potential financial implications. Understanding the rules and consequences is important before considering this step.

Qualifying for a Hardship Withdrawal

For a withdrawal to be considered a “hardship” by the Internal Revenue Service (IRS), it must stem from an “immediate and heavy financial need.” This means the need is pressing and cannot be met through other available resources. The amount withdrawn must not exceed what is necessary to satisfy that specific need.

The IRS defines specific safe harbor events that generally qualify for a hardship withdrawal. These include medical care expenses for you, your spouse, dependents, or plan beneficiary. Costs directly related to the purchase of a principal residence, excluding mortgage payments, are also considered a qualifying event. Additionally, payments needed to prevent eviction from or foreclosure on your principal residence are included.

Other qualifying reasons involve tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for you, your spouse, dependents, or beneficiary. Funeral or burial expenses for your deceased parent, spouse, children, dependents, or beneficiary also qualify. Expenses to repair damage to your principal residence that would qualify as a casualty loss under tax law are also permissible. Specific rules can vary depending on your 401(k) plan document.

Understanding Withdrawal Limits and Eligible Funds

Hardship withdrawals are generally limited to the amount needed to satisfy the immediate and heavy financial need, plus any amounts required to cover income taxes on the withdrawal. You cannot withdraw more than is necessary to address the specific financial emergency.

Historically, hardship withdrawals were limited to an employee’s elective deferrals. However, regulations effective for distributions made on or after January 1, 2020, expanded the types of funds available. Now, 401(k) plans may permit hardship withdrawals to include earnings on elective deferrals, as well as qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), including their earnings. The exact amount and type of contributions available depend on your specific 401(k) plan’s rules.

Unlike a 401(k) loan, a hardship withdrawal does not need to be repaid. However, it permanently removes funds from your retirement account, which can impact your long-term savings goals. For hardship distributions made on or after January 1, 2020, the prior requirement for a mandatory six-month suspension of contributions after a hardship withdrawal was eliminated. Participants can now resume contributions immediately, helping them to rebuild their retirement savings sooner.

Tax and Penalty Considerations

A hardship withdrawal from a 401(k) is generally considered taxable income in the year it is received. The amount withdrawn will be added to your gross income and subject to your ordinary federal income tax rate. State income taxes may also apply.

In addition to income taxes, if you are under age 59½, the distribution is typically subject to an additional 10% early withdrawal penalty. This penalty is imposed by the IRS to discourage early access to retirement funds. However, certain exceptions may allow you to avoid this penalty.

Common exceptions to the 10% penalty include unreimbursed medical expenses exceeding 7.5% of your adjusted gross income. Other exceptions apply for distributions due to total and permanent disability, or if you separate from service with your employer at age 55 or older. Recent legislation, such as the SECURE 2.0 Act, introduced additional penalty-free withdrawal options for specific circumstances. While these exceptions may waive the penalty, the withdrawal remains subject to ordinary income tax.

Steps for Requesting a Hardship Withdrawal

To request a hardship withdrawal, contact your 401(k) plan administrator or employer’s human resources department. They can provide information about your plan’s policy and required application forms. Each 401(k) plan has its own procedures and criteria for approving requests.

You will need to provide documentation to substantiate the immediate and heavy financial need. This evidence might include medical bills, purchase agreements, eviction notices, or tuition invoices. While some plans may allow you to self-certify the hardship, you remain responsible for retaining supporting documentation in case of an IRS audit.

After gathering documentation, complete and submit the application form. The plan administrator will review your application to ensure it meets IRS requirements and your plan’s criteria.

Once approved, the timeline for receiving funds can vary, but it typically takes several business days to a few weeks for the disbursement to be processed and delivered.