How to Get a Hardship Withdrawal From Your 401k

A 401(k) hardship withdrawal allows you to access funds from your retirement savings for a significant and pressing financial situation. This action is a financial tool of last resort when other resources are unavailable. The Internal Revenue Service (IRS) and individual 401(k) plans have established strict rules governing these withdrawals.

Taking a hardship withdrawal directly impacts the long-term growth of your retirement savings. When you withdraw funds, you reduce your account balance and lose the potential compound earnings that money would have generated over time.

Determining Your Eligibility for a Hardship Withdrawal

To qualify for a hardship withdrawal, you must meet two requirements set by the IRS. First, you must have an “immediate and heavy financial need.” Second, the withdrawal must be “necessary to satisfy that financial need,” meaning you have exhausted all other reasonably available financial resources.

The IRS created a set of “safe harbor” events that automatically satisfy the immediate and heavy financial need test. Your situation must fall into one of these approved categories:

• Certain medical care expenses for yourself, your spouse, dependents, or your plan beneficiary.
• Costs directly related to the purchase of your principal residence, such as a down payment.
• Tuition, related educational fees, and room and board for the next 12 months of post-secondary education for yourself, your spouse, children, or beneficiary.
• Payments necessary to prevent your eviction from your principal residence or to stop foreclosure proceedings on your mortgage.
• Funeral expenses for a deceased parent, spouse, child, or beneficiary.
• Expenses for the repair of damage to your principal residence that would qualify for a casualty deduction.
• Expenses and losses incurred on account of a federally declared disaster.

Even if your situation meets a safe harbor criterion, the amount you request cannot exceed the amount of the financial need. You should also consult your plan’s summary plan description, as your employer’s plan may have its own rules and may not permit withdrawals for all IRS-approved reasons.

The Application and Approval Process

To request a hardship withdrawal, you must apply through your plan administrator. Application forms are available through your administrator’s online portal or your company’s human resources department. On the form, you will provide personal information, the amount requested, and the reason for the withdrawal.

The process requires you to certify that you have an immediate and heavy financial need and that the withdrawal is necessary. You must attest that the amount is not more than what is needed and that you have exhausted other available resources. Many plans allow you to self-certify this information without submitting supporting documents like invoices to the administrator.

Even with self-certification, you should gather and retain documentation proving your need for your own records in case of an IRS audit. Once submitted, the plan administrator reviews your application to verify it qualifies under IRS and plan rules, which can take from a few business days to a couple of weeks.

Upon approval, the administrator processes the fund distribution and handles the required tax withholding. You can receive the money via direct deposit or a paper check.

Alternatives to Hardship Withdrawals

Recent laws have created several penalty-free withdrawal options that can serve as alternatives to a traditional hardship withdrawal. These options are distinct from hardship withdrawals and are available only if your employer’s plan adopts them:

• Domestic Abuse: A victim of domestic abuse may be permitted to withdraw the lesser of $10,000 (indexed for inflation) or 50% of their vested account balance. This withdrawal is not subject to the 10% early withdrawal penalty, and the amount can be repaid to the plan within three years.
• Terminal Illness: An individual who a physician certifies has an illness or condition expected to result in death within 84 months may be able to take a penalty-free withdrawal.
• Emergency Expenses: A plan may allow a participant to withdraw up to $1,000 once per year for unforeseeable or immediate personal or family emergency expenses. This withdrawal is also penalty-free and can be repaid within three years.

Tax and Financial Consequences of a Withdrawal

A hardship withdrawal has significant tax and financial consequences. The amount you withdraw is considered ordinary income for the year you receive it and is taxed at your federal and any applicable state income tax rates. While many early withdrawals from a 401(k) before age 59 ½ are subject to an additional 10% penalty, qualifying hardship withdrawals are an exception to this penalty.

A hardship withdrawal is a permanent distribution, not a loan, and the money generally cannot be repaid to your account. This withdrawal permanently reduces your retirement savings and diminishes the principal amount available to grow tax-deferred. The loss of future compound earnings can have a substantial impact on your final retirement balance.

Previously, a hardship withdrawal triggered a mandatory six-month suspension of 401(k) contributions. This requirement has been eliminated at the federal level, so you are no longer automatically barred from contributing. However, you should check your specific plan’s rules to see how your ability to save may be affected.