What is a 401(k) Hardship Withdrawal?
A 401(k) hardship withdrawal is a provision that allows employees to take money from their 401(k) retirement savings plan before reaching retirement age. This withdrawal is permitted only under specific circumstances, which are outlined by the Internal Revenue Service (IRS).
Eligible Hardship Situations
- Medical Expenses: Uncovered medical costs for the employee or their dependents.
- Home Purchase: Costs related to purchasing a primary residence.
- Education Expenses: Tuition and educational fees for the employee or their dependents.
- Preventing Eviction or Foreclosure: Payments to avoid losing a home.
- Funeral Expenses: Costs related to the death of a family member.
Withdrawal Limitations
When making a hardship withdrawal, the amount taken must be necessary and cannot exceed the employee's financial need. Additionally, employees may be required to exhaust other available resources, such as loans from their 401(k) plan, before accessing this option.
Consequences of Hardship Withdrawals
Hardship withdrawals are subject to income tax, and if the employee is under 59½ years old, a 10% early withdrawal penalty may also apply. This can significantly reduce the amount received, making it crucial to consider the long-term impact on retirement savings.