While money in a 401(k) should usual⛎ly be treated as off-limits for spending, you do have the option to withdraw these funds in a financial emergency. This is known as a 401(k) hardship withdrawal.

Most people with a 401(k) plan will rely on this account for the majority of their retirement savings, so a withdrawal shouldn’t be your first choice to cover a major expense. However, if you’ve used up other savings, including your 澳洲幸运5官方开奖结果体彩网:emergency fund, a 401(k)😼 hardship withdrawal may be the best choice to avoid a prol🌠onged financial setback.

401(k) Hardship Withdrawal Basics

A 澳洲幸运5官方开奖结果体彩网:hardship withdrawal, sometimes known as a hardship distribution, is the removal of funds from a retirement savings account for an emergency. The 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) broadly allows for these withdrawals to address “an immediate and heavy financial need;” the size of the withdrawal is limited to what is necessary to address that immediate need.

“Aಌ hardship withdrawal must be for specific reasons, such as medical expenses, preventing eviction or foreclosure, funeral costs, tuition, home purchase, or major repairs after a disaster,” says , CFP, CDFA, and president of financial planning group Pearl Planning. “It should be considered nearly a last resort.”

Individual plans will have different rules about whether and when such withdrawals are permitted. For example, some plans may limit the amount you can withdraw or require you to take a 401(k) loan first. Some ꦏplans may not allow hardship withdrawals at all.

If your plan does permit hardship withdrawals, the amount you withdraw cannot be repaid into your account. You can only continue contributing as usual, up to the annual maximum. Depending on the reason for the withdrawal, you may also have to pay an 澳洲幸运5官方开奖结果体彩网:early withdrawal penalty if you have not yet reached age 59½. The amount you withdraw will be treated as income, which means you will need to pay any federal, state, or local 澳洲幸运5官方开奖结果体彩网:income tax on the amount.

Legislative Changes

The Bipartisan Budget Act of 2018 made several changes to how hardship withdrawals are handled. These include:

• Eliminating the requirement first to take a plan loan before you can make a hardship withdrawal
• Allowing qualified non-elective or qualified matching contributions to be withdrawn in addition to contributions withheld from your paycheck
• Repealing the required six-month suspension of elective deferrals to a plan after a hardship withdrawal

The 澳洲幸运5官方开奖结果体彩网:SECURE 2.0 Act of 2022 also impacted how withdrawals from 401(k) plans are handled. Under this legislation, you can withdraw up to $1,000 per year from your plan for emergency family or personal expenses without paying a 10% penalty. You have the option to repay this amount within three years.

Common Reasons for a 401(k) Hardship Withdrawal

Hardship withdrawals are intended to be used for significant, immediate financial needs. These include:

• 澳洲幸运5官方开奖结果体彩网:Medical expenses for you, a spouse, or a dependent
• Total and permanent disability
• Costs relating to buying a primary residence (not mortgage payments)
• Postsecondary educational expenses, including tuition, fees, or room and board
• Payments to prevent eviction from your home
• Funeral or burial expenses
• Birth or adoption expenses
• Disaster recovery in a federally declared disaster zone
• Domestic violence
• Terminal illness of the account owner

Not all 401(k) plans allow for the same types of hardship withdrawals. Employers aren’t required to allow hardship withdrawals for:

• Buying a 澳洲幸运5官方开奖结果体彩网:principal residence
• Paying postsecondary tuition and other associated expenses
• Preventing an eviction or 澳洲幸运5官方开奖结果体彩网:foreclosure
• Funeral or burial costs
  

Tꦆax Implications and Penalties of a Hardship Withdrawal

In some circumstances, a hardship withdrawal will be considered an early distribution if you are under age 59½. This means you will be required to pay a 10% early 澳洲幸运5官方开奖结果体彩网:withdrawal penalty on top of any income tax that you owe. The table below summarizes when you will and will not owe a penalty.

How to Make a 401(k) Hardship Withdrawal

To make a hardship withdrawal, first consult the summary plan description (SPD) for your 401(k), which wi♔ll outline situations in which a withdrawal can be made. T🔯hen, contact your employer and plan administrator to initiate the process.

You will likely need to provide documents proving immediate and serious financial need, such as medical bills or an invoice from a funeral home. Depending on the terms of the plan, you may also be required to show that you do not have other resources available to address the financial need. The 澳洲幸运5官方开奖结果体彩网:plan administrator will review your request and check that it meets the plan’s criteria for a hardship withdrawal.

Once the request is approved, the plan administrator will process the withdrawal, and the funds will be released to you. You will need to pay any🉐 applicable taxes and pen🎉alties on the withdrawal.

Risks of a 401(k) Hardship Withdrawal

“A har⭕dship withdrawal is not to be taken lightly,” says Joy. “First, remember that not all the money you withdraw goes directly into your pocket. Some of the funds will be used to pay the IRS and state income taxes.”

The long-term risk of a hardship withdrawal, though, is the dent that it leaves in your retirement savings. The funds you withdraw c🍬annot be paid back, which can significantly reduce your retirement savings. Depending on your age, it may be difficult to replace those funds before you stop working.

Even with those risks, however, Joy sometimes recommends hardship withdrawals. “Let’s say you had a significant setback that came out of the blue and drained your emergency reserves, or you’ve overfunded retir🃏ement but didn’t adequately plan for your kids’ college,” Joy says. “Well, utilize the options you have, including hardship withdrawals, to get through these difficult times.” 

401(k) Hardship Withdrawal vs. 401(k) Loan

A common alternative to a hardship withdrawal is a 澳洲幸运5官方开奖结果体彩网:401(k) loan. Though both involve taking money out of your 401(k) account, the process and implications fo✃r your long-term savinꦰgs are very different.

A 401(k) loan allows you to borrow money from your account and repay it at a later date. You can borrow up to $50,000 or 50% of your vested account balance, whichever is less. Unlike a hardship withdrawal, you won’t have to pay income tax or an early withdrawal penalty on the amount you borrow.

You will have to repay the loan, plus interest, within five years. However, unlike a traditional loan from a bank, the interest is paid back into your own 401(k) account; you pay yourself back, rather than a separate financial institution.

👍Joy often advises clients to consider a 401(k) loan before taking a hardship withdrawal. “Their interest rates can be more competitive ꦛwith personal loans or revolving debt,” she says.

Still, she recommends not taking out a loan 🤪unless you have a solid plan to repay it. “Some employers will demand rep💞ayment if you leave your job,” she adds. “And keep in mind that not every retirement plan offers loan options.”

The Bottom Line

In general, it’s best to leave your retirement savings invested so the money can grow without interruption. However, if you have a sudden financial emergency that you can’t cover from your existing ass꧅ets or emergency funds, a hardship withdrawal from your 401(k) can be the best available option.

The specific terms of when and how you can use this money will be outlined in your 401(k) plan summary. But keep in mind that using your retirement funds early sꦦhould only be done as a last resort.

“If you frequently find yourself relying on har🐎dship withdrawals or loans, a careful review of your spending and finances may be warranted,” Joy says. “That said, hardship withdrawal✤s can be a lifesaver.”