401k Hardship Withdrawals [What You Need To Know]

401(k) Hardship Withdrawals – What You Need to Know

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A record number of Americans are taking hardship withdrawals and tapping into their 401(k)s.

According to Fidelity, “Participants taking hardship withdrawals from their accounts rose to 2.4% last year, up from 1.9% in 2021.”

Vanguard also recorded a rise in hardship withdrawals in 2022.

While alarming, it isn’t surprising as last year saw record high inflation, rising interest rates, and a 15% year-over-year increase in credit card balances.

Whether 401(k) investors need the money to cover medical bills, to stay off eviction, or to pay tuition expenses, it’s clear they’re hurting for extra cash right now.

Before you dip into your retirement savings, it’s critical to understand the implications of doing so.

From taxes to losing more money than you planned, there’s a lot to consider before making the move.

Defining the Hardship Withdrawal

Hardship withdrawals are defined by the IRS as taking money out of your 401(k) because of an immediate financial need that’s limited to the amount to satisfy the hardship need – not the amount you want.

The need of the employee also covers the employee’s spouse or dependents.

With a 401(k) hardship withdrawal, you pull money from your savings, and you cannot pay it back like you do a 401(k) loan.

If you qualify for a hardship withdrawal, the money you take out will be taxed as ordinary income if you are under age 59½, but you won’t have to pay the 10% penalty.

Key Factors to Consider before Pulling Money from Your 401(k)

#1 First things first – not all plans allow for the hardship withdrawal.

If your plan does allow for it, you will likely have to provide proof of the hardship and get approval that it meets the criteria.

#2 The money may not be immediately available. Each plan has a different set of rules it must follow so it may take weeks to get the money from your 401(k). If you need cash ASAP, you need to look for other alternatives.

#3 Taxes are another thing to consider.

Whether you qualify for a hardship withdrawal or not, you must pay taxes on the amount withdrawn – and it’s considered ordinary income.

The last thing you want to do is get cash for a short-term need, only to find out it’s bumped you up to the next tax bracket.

If you’re willing to take the tax hit, we still recommend you speak with your CPA or tax professional to find out the real cost of cashing out. When all is said and done, the cost may outweigh the need.

#4 Lastly – and this is a big one – you should avoid taking out money from your 401(k) when the market is down.

Remember, you only lose money if you cash out at the bottom of the market. Taking a 401(k) withdrawal when the market is low means you have to withdraw a larger percentage of your account.

Alternatives to a 401(k) Hardship Withdrawal
In an ideal world, you wouldn’t touch your 401(k) until retirement.
Here are a few alternative options to the 401(k) hardship withdrawal should you need money to cover an emergency.

Medical Expenses: There are numerous companies that provide financing options, such as CareCredit or accessone.

Housing and Living Expenses:
Tap into other non-retirement savings, such as brokerage accounts.
Take money from your Roth IRA.
Take out a home equity line of credit. Because you use your home as collateral, you may get a better interest rate and a longer payback.
Take out an unsecured personal loan to get you through.
Apply for a 0% credit card, put the money on that card, and then pay off interest-free before the interest-free promotional period expires.

Another option is to take out a 401(k) loan.
With a 401(k) loan, you borrow from yourself, and you have to pay it back with interest, typically within 5 years of taking the loan.
A 401(k) loan is not a distribution like the hardship withdrawal.
The benefit here is that you do not have to pay penalties and taxes should you pay it back on time. And, the interest you pay on the loan goes back into your retirement savings.

There is a downside: In the event you lose your job or quit, you will be forced to pay back the loan in full before tax day the following year.

If you can’t pay it back on time, the loan will be treated as an early withdrawal, and the unpaid loan balance will be considered a taxable distribution.

Also, if you are under age 59½, you will have to pay a 10% federal tax penalty on the unpaid balance along with income taxes on the balance of the loan.

Final Thoughts

Should you need money for a hardship, whatever you decide to do, we recommend speaking with a tax professional, as well as a financial advisor.

[Riggsnic_co]

We experienced the peak of our era, and now it is gone. Recession is tanking everything including 401K. My retirement equities portfolio of $750K is in the reds. I keep losing because of inflation. This world will fall to the corrupt rulers in the same way that Rome did. I'm sorry if you're thinking about retiring and you're worried that your pension won't be enough to meet the rising cost of living. Horrible foreign policies everywhere, bad regulatory policy, bad fiscal policy, and bad energy policy.

[Mike-psrz]

Being nervous about taking out from the half of the money that we put in the account is nuts.

[dieselburner]

Money that we put in and we need a reason to take it back out?
And pay a penalty on it is crazy. Taxes I understand but to have to literary beg and give them a reason is the main reason why a person should invest their money in real estate or some type of index fund instead of 401k . You can buy and sell whenever and not have to ask for your money back lol

[john]

I must say I love dividend investing, getting those payments in for just holding a company is amazing. from what I've witnessed it all comes down to having a Licensed investment Adviser to handle your portfolio. All thanks to mine, who has traded my savings daily from quarter a million to almost one million dollars in the last 9 months.❤✅

[Jr-kcit]

My wife lost her job but the 401k is under my name. She helped with the bills. Is this considered a hardship?

[deequinn]

I don’t know if i heard correctly but you said you don’t have to pay the 10% penalty if you are under 59.5 for a hardship? That’s actually incorrect.

[AnonymousAccount]

i did it because my company is forcing me to take an unpaid vacatiion during the holidays

[christinerester]

We have hail damage on our house and only need to take out a small amount. Do you know the documents they require? With Vanguard

[matthewj]

Thanks for the video please don’t zoom in so much

[TheCoppergoat]

I have 501k and i’ve been losing money from my Levi’s pocket on a daily basis

[galaxygolden]

Great video brother!
Exactly what I need to hear. I'm worried wifey and I will get bumped into next bracket! We make 180k combined and a hardship withdrawl of 10k is what we're looking for
Will speak to CPA about our tax bracket!

[nathanielcollick]

What if you want to cash your 401k because you no longer work at that job and you cant roll the plan over to the next job?

[kindriacane]

The the company that I’m buying my mobile home doesn’t want me to do the hardship until closing because it will show up on my paystub as a loan and affect my debt to ratio. Is this true?

[Oceanbreezebreath]

What is considered a principle residence. Is it just only purchasing a new home or can you use it for down payment for rental property

[matdope]

I got a question for any one who had withdrawn recently in 2023 or 2024 did you have to show prove of any way ?

[cchrisman]

I need to take a hardship loan for emergency funds, i dont meet any of the 6 reasons to get a loan. My qustion is if i get it and they audit me and i cant provide documention can i be terminated by my employer?

[kenzeng]

Hi my income is $120k in 2022. I took out a hardship withdrawal to buy my house in 2023 amount $180K. So my taxable income for 2023 is $300K, and my tax bracket is for 2023 is $300K? Thanks!

[STOPBlTCHlNG]

Here is a question. I currently have a loan on my 401k and we are about to purchase a home. It would be nice to get rid of that payment. We have enough to pay off the loan, but was hoping to get the same amount back through the hardship. Fidelity is unable to tell me the amount I could take with the hardship if we paid off the loan. They can only tell us what the hardship is to date. Any ideas how to calculate this?

[CRA]

So I pay tax when I withdraw the hardship and I have to pay more tax when I do my taxes the following year ?

[marchandnoel]

What Companies Are Best to Find lost 401k ?