Should You Take a Hardship Withdrawal?

If you are considering a hardship withdrawal, by definition you have a challenging, time-sensitive financial problem. You are probably feeling very worried and anxious about your situation. When money is tight, it is tempting to look to your retirement plan for resources to solve the problem.

Under certain limited circumstances, you may be able to access funds in your 401(k) or 403(b). However, just because you could withdraw funds doesn’t mean that you should do it. A hardship withdrawal should only be used as a last resort, in a truly urgent situation. Why?

It is expensive both now and later. You will pay income taxes on the amount you withdraw, as well as an additional 10% penalty if you are under age 59½. If the withdrawal is large, it could bump you up into a higher marginal income tax rate. Plus, you’re taking away funds which should grow to provide income in retirement for your future self. Here are some questions to help you to find the best choice for your situation:

1. Does this have to be paid right away?

Sometimes a need is urgent, very important and immediate. Some examples include preventing eviction or foreclosure, paying for medical treatment, or repairing your home after a natural disaster so you can live in it. In those cases, a hardship withdrawal for the amount of the need may be the only way you could stay in your home or get the care you or a family member needs. If the bill does not have to be paid all at once, such as a past-due medical expense or a home purchase you could defer, it may be better not to take a hardship withdrawal.

2. Do I have any other sources of funds?

Have you considered all your options? While your cash situation isn’t ideal, make sure you have thought about all things you could sell or places you could borrow from to raise funds:

  • Do you have any non-retirement investments you could liquidate such as stocks, bonds, or CDs even if it means you would take a loss?  Taking a loss on an investment is usually much less costly over the long run than withdrawing funds from your retirement plan.
  • Do you have a Roth IRA? If so, you can withdraw the contributions – but not the earnings – without taxes or penalty.
  • Can you borrow against your home equity or take a personal loan?
  • Do you have non-essential personal property you could sell to raise some cash? Some examples might include a second car, motorcycle, art, collectibles or jewelry.

3. Could you take a retirement plan loan?

Before deciding on a hardship withdrawal, explore taking a loan from your 401(k) or 4013(b). Many, but not all, employer-sponsored plans permit loans that allow you to borrow up to fifty percent of your vested balance up to a cap, whichever is less, for a one to five year period. Some plans also permit longer term loans for the purchase of a home.

The interest rate is usually low and paid into your own account, payments are deducted from your paycheck and it’s not reported to the credit bureaus. See here for situations when a retirement plan loan may make sense. A retirement plan loan has downsides, but they’re not as impactful as a hardship withdrawal.

4. Would the IRS consider your situation an allowed “hardship?”

A hardship is something that causes suffering or privation. The IRS allows hardship withdrawals from qualified retirement plans when the employee has immediate and heavy financial need, limited to certain:

  • Medical expenses incurred by you, your spouse or dependents
  • Payments to avoid eviction from or foreclosure of your primary residence
  • Post-secondary education expenses for you, your spouse, children or other dependents
  • Funeral expenses for you, your spouse, children or other dependents
  • Expenses to repair damage to your primary residence
  • Costs to purchase a primary residence

Note that credit-related needs such as satisfying payday loans, title loans or credit card debts are not covered under the definition, nor are tax bills or business expenses. See IRS guidelines here.

5. Are you taking out funds to purchase a home or pay tuition?

Finally, just because the IRS considers a home purchase or tuition payment a hardship does not mean it’s always wise to take a withdrawal for those reasons. A hardship withdrawal is meant for a true emergency. If the only way you can purchase a home is by taking a hardship withdrawal from your retirement plan for the down payment, you may not be financially ready yet to be a homeowner. As for tuition, consider exploring other options listed in #2 and #3 first, such as borrowing against your home equity or taking a retirement plan loan.

Once you’ve worked through these questions, if it seems like a hardship withdrawal is the best choice for you, know that you’ll have to go through an application process to move forward. You may be required to demonstrate heavy and immediate financial need, that you’ve considered a retirement plan loan but the payments would be burdensome, and that your financial need can’t be satisfied through other channels. Expect the process to take a few weeks.

If you do take a hardship distribution, you won’t be able to pay the money back and you may be precluded from contributing to your plan for six months. Your distribution will be included in your taxable income, plus you’ll pay an additional 10% penalty if you’re younger than 59 ½. If you have access, consider contacting your workplace financial wellness or employee assistance program for financial coaching, to help you put together a plan to manage your cash flow so you can get back on track.


Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.



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