Hardship withdrawal

What is a hardship withdrawal? 

A hardship withdrawal is a distribution taken from your 401(k) or 403(b) account before retirement to address a specific financial need. According to the IRS, there must be an "immediate and heavy financial need" to qualify for this type of emergency withdrawal.

Why take a hardship withdrawal? 

Most plans follow IRS "safe harbor" rules, which outline clear situations that qualify for a hardship withdrawal, and commonly include:

• Medical expenses: Costs for medical care for you, your spouse, or your dependents.

• Housing costs: Expenses directly related to purchasing your principal residence (excluding mortgage payments), or payments needed to prevent eviction or foreclosure.

• Educational fees: Tuition and related fees for up to the next 12 months of post-secondary education for you, your spouse, or your dependents.

• Funeral expenses: Costs associated with the funeral or burial of a deceased parent, spouse, child, or dependent.

• Home repairs: Specific casualty losses to your principal residence resulting from an event that is unusual, sudden, or unexpected.

Your plan document will outline the specific requirements that must be met to receive a hardship withdrawal.

How do hardship withdrawals work? 

Before you can request a hardship withdrawal, you must exhaust all other means of assistance, including in-service withdrawals allowed from your plan. You are only allowed to withdraw only the amount necessary to cover your financial need, which can include any taxes and penalties you will owe on the withdrawal itself.

What to consider before taking a hardship withdrawal

A hardship withdrawal is considered taxable income in the year it is distributed. This means you will owe income tax on the funds, and you may also be subject to an additional 10% early distribution tax. Additionally, taking money out now could impact long-term savings goals, as you are removing part of your total savings, as well as the future appreciation of that sum.

Alternative options 

If you are able to repay the funds in a timely manner, you might want to consider a plan loan instead of a withdrawal. With a loan, you must repay the amount with interest, but that interest is ultimately returned to your own account. Before making a decision, however, it’s wise to consult a tax professional or other qualified financial advisor.