401(k) Hardship Withdrawals—Understand the Tax Bite and Long-Term Consequences

Under certain circumstances, it may be possible to access your 401(k) funds before retirement. Check with your employer for the specifics of your plan. A hardship withdrawal should be a choice of last resort. You will never get the full amount that you withdraw because you will have to pay taxes.

Hardship withdrawals generally are:

  • Available if your employer's plan permits them, but are not required by law;
  • Not loans—they cannot be repaid;
  • Subject to regular taxes—your employer will likely deduct 20% up front; 
  • Subject to a 10% penalty tax if you are not 59 ½ or older;
  • Available only after you have withdrawn all other available 401(k) funds;
  • Not available after you have been terminated.

Hardship withdrawals are allowed to:

  • Purchase or repair a primary home;
  • Pay education tuition, room and board, and fees for the next 12 months for you, your spouse, children, and other dependents;
  • Prevent eviction or foreclosure on your primary residence;
  • Address severe financial hardship;
  • Pay for unreimbursed medical expenses for you, your spouse, children and other dependents;
  • Pay for funeral expenses for immediate family members—parents, spouse, children, and other dependents.

The 10% penalty tax is waived if your hardship withdrawal results from:

  • Your total and permanent disability;
  • Medical bills that exceed 7.5% of your adjusted gross income;
  • A court order to pay funds to a spouse, child or dependent;
  • Permanent lay off, termination, quitting or early retirement in the same year you turn 55.
  • Permanent lay off, termination, quitting or retirement accompanied by payments for the rest of your (or your designated beneficiaries') life or life expectancy that continue for at least 5 years or until you reach age 59 ½, whichever is longer.

Hardship withdrawals are costly in the short term when you pay taxes. Over the long term, they also cost you when the withdrawn funds are not there to grow with the help of compounding.