How to Actually Do a 401(k) Hardship Withdrawal – Avoid This Mistake + FAQs

To do a hardship withdrawal from your 401(k), you must meet strict IRS criteria (such as certain medical bills, foreclosure prevention, or other emergencies), check that your employer’s plan allows it, gather required documentation, and submit a formal hardship request to your 401(k) plan administrator for approval.

This process lets you pull money from your retirement account early for an “immediate and heavy” financial need, but it comes with important rules, taxes, and potential penalties.

In this comprehensive guide, we’ll explain how to take a hardship withdrawal from both traditional and Roth 401(k) plans, what the federal law requires, how state laws differ, and the pros and cons to consider.

We’ll also break down common hardship scenarios (medical expenses, home eviction prevention, tuition, etc.), highlight mistakes to avoid, and answer frequently asked questions. 😊

By the end, you’ll understand the eligibility rules, paperwork, tax implications, and alternatives so you can make an informed decision.

What you’ll learn in this article:

• Exact Steps to Take a 401(k) Hardship Withdrawal: We outline the process from checking your plan rules to getting approval, including documentation and timeline.
• Federal and State Rules Explained: Understand IRS hardship criteria under federal law (for both Traditional and Roth 401k accounts) and see a table of state-by-state differences in taxes and unique rules.
• Eligible Hardship Reasons (and Lesser-Known Ones): All IRS-approved hardship reasons (medical bills, foreclosure/eviction, funeral costs, tuition, home repairs, disaster losses) are covered, plus nuances like new disaster provisions.
• Pros, Cons, and Common Mistakes: A clear table of advantages vs disadvantages of hardship withdrawals, and a section on pitfalls to avoid (like taxes, penalties, and employer-specific traps).
• Real-Life Scenarios, Alternatives, and FAQs: Breakdowns of three common hardship scenarios in table format, comparison of hardship withdrawals vs. 401(k) loans or other options, plus Q&As addressing top questions from people and advisors.

Federal 401(k) Hardship Withdrawal Rules (IRS Criteria & Plan Requirements)

Federal law sets the baseline for when and how you can do a 401(k) hardship withdrawal. Under Internal Revenue Service (IRS) regulations, a 401(k) plan may allow a hardship distribution only if two main conditions are met:

• Immediate and Heavy Financial Need: The withdrawal must be for an urgent financial necessity. In simple terms, this means you (or your spouse, dependents, or beneficiary) are facing a significant, pressing expense that you cannot pay with your regular income or assets. The IRS has defined specific categories of expenses that automatically count as an “immediate and heavy” hardship (detailed below).

• Necessary to Satisfy that Need: You can only withdraw the amount necessary to cover the financial need (plus any taxes or penalties on the distribution). You must have no other reasonable resources to meet the expense. In practice, this often means you’ve exhausted other options (savings, insurance reimbursements, or possibly loans) before turning to your 401(k).

Every 401(k) plan that offers hardship withdrawals (not all plans do) must spell out these criteria in its plan document. That is the legal document or summary plan description (SPD) that outlines all the plan’s rules.

The plan can choose to be more restrictive than the IRS rules if it wants. For example, an employer’s plan could limit hardship withdrawals to certain reasons or set additional conditions.

ERISA (the Employee Retirement Income Security Act) is the federal law that requires plan sponsors to follow the plan’s written terms consistently, so employers cannot bend the rules on a case-by-case basis.

This means even if you have a sympathetic situation, the plan administrator (often your employer’s HR or a third-party firm like Fidelity) must abide by the predefined hardship criteria.

IRS Safe Harbor Hardship Reasons: The IRS provides a safe harbor list of expenses that are deemed to qualify as an “immediate and heavy” financial need.

If your hardship fits one of these categories, the plan can treat it as automatically eligible (provided the plan allows that category). The federally-approved hardship reasons include:

• Medical Expenses: Costs for medical care (or to obtain medical care) for you, your spouse, your children, other dependents, or even your primary plan beneficiary. Typically, these are unreimbursed medical or dental bills that would be tax-deductible (beyond a certain percentage of income) – for example, a big hospital bill or surgery cost not covered by insurance.

• Purchase of a Primary Residence: Money needed for buying your main home (e.g. down payment or closing costs). Note that paying off an existing mortgage or making regular mortgage payments does not qualify – this reason is strictly for acquiring a principal residence (or building one). Essentially, it’s meant to help with the one-time lump sums required to become a homeowner, not ongoing housing payments.

• Tuition and Education Fees: Tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for yourself, your spouse, children, or other dependents. This can cover college or trade school costs, for example.

• (Important: 401(k) hardship withdrawals for education do not get any special tax penalty exemption, unlike IRAs which allow penalty-free withdrawals for education – we’ll discuss differences later.)

• Preventing Eviction or Foreclosure: Expenses necessary to prevent you from being evicted from your primary residence or to stop foreclosure on that home.

• Typically this means you have received an eviction notice for unpaid rent or a foreclosure notice from your mortgage lender, and you need a certain amount to catch up and keep your home. Plans will require documentation, such as a formal eviction letter or foreclosure filing, showing that your primary residence is at imminent risk.

• Funeral or Burial Expenses: Costs for the funeral or burial of your parent, spouse, children, or other dependents. For example, if a family member passes away and you are responsible for arranging the funeral, those expenses can qualify for a hardship withdrawal. (This category is often less known, but it’s explicitly allowed.)

• Certain Home Repairs (Casualty Losses): Expenses to repair damage to your primary home that would qualify for a casualty deduction under the tax code. In plain language, this means major damage from unexpected events like fires, floods, earthquakes, or similar disasters.

• The damage must be severe enough that it would be deductible on taxes (prior to recent law changes, casualty losses had to exceed a threshold and be in a federal disaster area to deduct – but the hardship rule uses the old standard without the stricter limits). For example, if a storm wrecks your home’s roof, the repair costs could be a hardship reason.

• **Certain Disaster Expenses (FEMA-declared disasters): This is a newer addition to the hardship list. If you live in an area that has been declared a disaster zone by FEMA (Federal Emergency Management Agency) – for instance, due to a hurricane, wildfire, or similar major disaster – you can take a hardship withdrawal to cover expenses and losses (including lost income) directly resulting from that disaster.

• This was added to ensure people can access their 401(k) funds quickly when recovering from federally declared disasters, without waiting for special legislation.

These seven categories cover all the federal hardship withdrawal reasons. Your employer’s plan may allow all of them or only a subset. For example, some plans might permit hardship withdrawals for medical and eviction but choose not to allow the home purchase category.

It’s crucial to check your specific 401(k) plan’s rules (usually found in the plan documentation or by asking HR) to know which hardships are covered. The plan document will also outline any internal procedures you must follow (like filling out a certain form, or using an online withdrawal request system).

Key Point: Hardship withdrawals are optional for plans – federal law doesn’t require 401(k) plans to offer them. Many large employer plans do, to give participants a last-resort option in emergencies.

However, if your plan does not permit hardship distributions at all, you unfortunately cannot take one (you’d have to consider other options like a loan or IRA withdrawal).

Traditional vs Roth 401(k) Hardship Rules: Both traditional and Roth 401(k) accounts are subject to the same hardship eligibility criteria above. In other words, you must have a qualifying reason and follow the plan’s rules regardless of whether the money is in a Roth or pre-tax source. The difference comes in tax treatment of the distribution:

• Traditional 401(k): Contributions were pre-tax, so any hardship withdrawal from these funds will be taxable income. You’ll owe federal income tax (and state income tax where applicable) on the amount. Additionally, if you are under age 59½, the 10% early withdrawal penalty generally applies (hardship itself is not an exemption from that penalty – a critical point many misunderstand). We’ll discuss penalty exceptions like medical expenses in a moment, but generally expect a 10% extra tax if under 59½.
• Roth 401(k): Contributions were made after-tax. When you take a hardship withdrawal from a Roth 401(k), the distribution will consist of a proportionate share of your contributions and any earnings (growth) in the account.
• The portion that comes from your original Roth contributions is not taxed again (since you already paid tax on that money). However, any earnings portion that comes out is taxable if the distribution is “non-qualified” (and a hardship distribution will almost always be non-qualified unless you’re over 59½ and satisfy the 5-year rule, which most hardship situations won’t).
• So, expect that part of a Roth 401(k) hardship withdrawal may be taxable. Also, the 10% early withdrawal penalty can apply to the earnings portion unless an exception applies. One bit of good news: because of how distributions are prorated, a chunk of a Roth hardship withdrawal is tax-free (the contributions part), effectively reducing the overall tax hit. But you cannot choose to withdraw only contributions or only earnings – the withdrawal is taken pro-rata from your Roth 401(k) balance in most plans.

Changes in Federal Rules (What’s New): In recent years, laws have made hardship withdrawals slightly more accessible. The Bipartisan Budget Act of 2018 (effective in 2019/2020) removed some old restrictions. Previously, employees had to take a 401(k) loan first (if available) before they could resort to a hardship withdrawal – that requirement has been eliminated.

Also, under old rules, if you took a hardship distribution, you were barred from contributing to your 401(k) for the next 6 months; this suspension rule has been abolished, so you can continue contributing (and should, to rebuild your savings) immediately after a hardship withdrawal.

Furthermore, plans now may allow hardship withdrawals from not just your own salary contributions, but also from employer matching contributions, employer safe harbor contributions, and earnings on all these (whereas before, hardship withdrawals were limited to the money you yourself contributed, excluding earnings). Not all plans have expanded to all these sources, but the law permits it.

Lastly, hardship self-certification is now often allowed: the IRS lets plans rely on the employee’s written certification that they have no other means to alleviate the hardship. This simplifies the process – rather than proving you’ve tried every alternative, you usually just sign a statement (often part of the request form) affirming that the distribution is necessary. However, you will still need to provide evidence of the hardship event itself (like the medical bills, tuition invoice, or eviction notice).

In summary, federal law provides the framework: it defines what counts as a valid hardship and imposes taxes/penalties on early withdrawals. Next, we’ll look at how state laws can differ in taxing these withdrawals, and then we’ll walk through the actual steps to initiate a hardship withdrawal under these rules.

State-by-State Differences in 401(k) Hardship Withdrawals (Taxes & Nuances)

While the qualification to take a hardship withdrawal is governed by federal law, state laws come into play mostly on taxation and minor procedural nuances. Every hardship withdrawal from a 401(k) will be subject to federal income tax (unless it’s from a Roth contributions portion) and potentially the federal 10% early distribution penalty.

States, however, vary in how they tax retirement distributions and whether they impose any additional penalties. Below is a state-by-state breakdown highlighting state income tax treatment of 401(k) withdrawals and any state-specific early withdrawal penalties or rules:

Notes on the table:

• States with “No (no state income tax)” do not tax income at all, so your 401(k) hardship withdrawal is free from state income tax in those places. This includes states like Florida, Texas, and Nevada, among others. For example, a Florida resident would only owe federal taxes on a hardship withdrawal, not state tax.

• States labeled “No (exempt retirement income)” have income taxes but specifically do not tax retirement plan distributions (at least under most circumstances). Illinois, Mississippi, and Pennsylvania fall in this category. Illinois, for instance, treats 401(k) and pension withdrawals as tax-exempt, regardless of age. (Mississippi and Pennsylvania also generally exempt retirement income, though if you take an early distribution before certain conditions, parts might be taxable – but for simplicity, they’re very retirement-friendly on taxes.)

• All other states marked “Yes” will tax a hardship withdrawal as part of your ordinary income, at their respective tax rates (the highest marginal rate is given as a reference for each). This means, for example, a California resident’s hardship distribution will be subject to California state income tax up to 13.3% in addition to federal tax, whereas a New York resident could see up to ~10.9% state tax. Many states have lower rates (like Indiana’s flat ~3.15% or North Dakota’s ~2.5%), but either way, expect state tax withholding or a bill at tax time, unless you’re in a no-tax or exempt state.

• State Early Withdrawal Penalties: The vast majority of states do not impose an extra penalty on early retirement withdrawals beyond the federal 10% penalty. The column shows “No” for essentially all states except California. California uniquely charges its own 2.5% additional tax on early distributions from retirement accounts (on top of the federal 10%).

• So a California participant under 59½ taking a hardship withdrawal faces not only federal penalty but also a 2.5% state penalty. (Note: A couple of states have special rules for certain plans, but California is the prime example of a state penalty. Most states, even those with income tax, stick to just taxing the income without an extra early withdrawal fee.)

• This table doesn’t list every nuance. Some states have special provisions like mandatory state tax withholding on retirement distributions or different treatment once you reach a certain age. For instance, Mississippi requires withholding on early distributions even though the income may ultimately be exempt if it qualifies as retirement income.

• Also, a few states have age-based exclusions (e.g., after age 59½ or 60, part of the income may be exempt), which aren’t directly relevant for a hardship (since by definition hardship withdrawals happen before typical retirement age). Always check your state’s current tax rules or consult a tax advisor, especially if the withdrawal is large – state taxes can significantly impact how much you should withhold or set aside.

In summary, where you live can affect the net amount you’ll get to keep from a hardship withdrawal. If you’re in a state with high taxes, plan accordingly (perhaps withhold a bit more for taxes). If you’re in a no-tax state or Illinois/PA/MS, you might avoid that state hit. And if you’re in California, be prepared for that extra 2.5% bite on top of everything else.

Now that we’ve covered eligibility and the regulatory landscape (federal and state), let’s move on to exactly how to initiate a hardship withdrawal from your 401(k), step by step.

How to Actually Do a 401(k) Hardship Withdrawal (Step-by-Step Answer)

Taking a hardship withdrawal involves several steps and careful compliance with both IRS rules and your employer’s procedures.

Here’s a step-by-step guide to answering the question “How do I do a hardship withdrawal from my 401(k)?”, incorporating everything we’ve discussed:

1. Confirm Your 401(k) Plan Allows Hardship Withdrawals: Before anything else, verify that your specific 401(k) plan permits hardship distributions. Not all plans do. You can check your plan’s Summary Plan Description or ask your HR department/plan administrator. If hardships aren’t allowed, unfortunately you cannot proceed (you might need to consider alternatives like a 401(k) loan or other funding sources instead).

2. Identify Your Hardship Reason and Ensure It Qualifies: Determine which eligible hardship category your situation falls under. Is it a qualifying medical expense, an eviction prevention, funeral cost, etc.? Review the IRS safe harbor list (or your plan’s allowed reasons) to make sure your circumstance matches one of them.

This is crucial – for instance, wanting to pay off credit card debt or buy a car will not qualify, whereas needing to pay an overdue hospital bill might. If you’re unsure, discuss with your plan administrator; they often have guidelines or a checklist of what counts.

3. Gather the Required Documentation: To prove the immediate and heavy need, you’ll usually need to provide documentation:

• For medical bills: an itemized hospital or doctor’s bill, explanation of benefits from insurance, showing the amount you owe out-of-pocket.
• For eviction/foreclosure: a signed notice or letter from the landlord or lender indicating the amount due and the date by which eviction/foreclosure will occur without payment.
• For funeral expenses: a funeral home contract or invoice.
• For tuition: a billing statement from the school with the required tuition/fees for the upcoming term.
• For home purchase: a purchase contract and a good faith estimate of closing costs, etc.
• For home repairs: estimates or bills from contractors for the repair, plus evidence of the casualty event (insurance claim, police report for a fire, etc.).
• For disaster relief: perhaps FEMA documentation or insurance claims related to the disaster. Basically, you need evidence of the cost and its urgency. Most plans will not approve a hardship without some paperwork. Some plans might not require you to send in the documents but will require you to keep them on file (and they can ask for them later, especially if the IRS audits the plan). It’s wise to have them ready.

4. Calculate the Amount You Need (and Can Withdraw): Figure out the dollar amount required to meet your need. Remember, it can include an extra cushion for taxes or penalties that will result from the withdrawal. You cannot withdraw more than necessary.

So, if your hospital bill is $8,000 and you expect about $2,000 will be withheld for taxes, you might request ~$10,000 total. Plans often have a mechanism to gross-up for taxes. Be realistic – the plan administrator will review if the amount requested seems justified by the documents.

Also, check if your plan has any minimum or maximum limits (some plans might say the minimum hardship withdrawal is e.g. $1,000 or that you can only withdraw up to, say, 50% of your account, even if IRS would allow more – though many plans allow up to the full amount of your contributions plus others allowed).

5. Submit the Hardship Withdrawal Request: This typically involves filling out a hardship withdrawal form provided by your 401(k) plan administrator.

Many plans now have online request systems via the plan’s website (for example, Fidelity, Vanguard, etc., have an online workflow). The form will ask for:

• Your personal details and plan info.
• The reason for the hardship (often a checkbox or selection from the allowed list).
• The amount you wish to withdraw.
• Possibly, a breakdown of the expenses.
• An affirmation/certification that you need this money and it’s necessary (and that you’ve exhausted other options). You may need to attach or send your documentation as well (e.g., upload PDFs of your bills). In some cases, your employer must sign off on the request – especially if using a third-party administrator, your HR might need to approve that your reason falls under the plan’s allowances. Follow your plan’s instructions to the letter, to avoid delays.

6. Wait for Approval and Processing: The plan administrator will review your application. They’ll check that:

• The reason is allowed by the plan and meets IRS criteria.
• The amount requested is not over the top for that hardship.
• Your documentation is in order. If everything is in line, they will approve the distribution. If there’s an issue (for example, missing paperwork or a non-qualifying reason), they may deny it or come back to you with questions. Timing can vary – some large plans process hardship requests in a matter of a few days, while others might take a couple of weeks, especially if manual review is needed. Keep in touch with HR or the plan’s customer service to monitor the status.

7. Receive the Distribution: Once approved, the 401(k) plan will liquidate the needed amount from your investments and pay it out to you. Typically, you can choose the method (a check mailed to you or a direct deposit into your bank account).

Mandatory tax withholding will apply: By federal law, 20% of a 401(k) hardship withdrawal will be withheld for federal income tax (unless it’s from a Roth 401k, then usually no withholding on the Roth contribution portion, but likely still on earnings).

Some plans might allow you to elect a higher withholding or you might also face state tax withholding depending on your state (for example, if you’re in a state that requires or you voluntarily choose state withholding). Note that the 20% federal withholding is not the same as the 10% penalty – it’s just a pre-payment of income tax.

The penalty, if applicable, isn’t withheld by default (except in certain states like CA which might also withhold for the state penalty). You’ll account for the exact taxes and penalty when you file your tax return.

When you receive the funds, they’re yours to use for the hardship purpose. Important: There is no requirement or mechanism to ensure you spend it on that purpose – but you attested that you needed it for that, and in theory the IRS or plan could ask to see that you actually had those expenses.

(In rare cases, misuse of hardship funds could be considered a form of fraud – see our later section on mistakes, where one individual was indicted for lying about using the money to buy a house). So, use the funds as intended and keep records of where the money went, in case of any future questions.

8. Pay Taxes and Penalties Later (if applicable): At tax time (the year following your withdrawal), you’ll receive a Form 1099-R from the plan showing the distribution amount, how much tax was withheld, and the coding of the distribution. You’ll need to report this on your income tax return.

The distribution will add to your taxable income for the year (unless it’s Roth basis which is not taxed – the 1099-R should indicate taxable amount). If you’re under 59½, generally the 10% early withdrawal penalty applies and will be calculated on your return (Form 5329 is used to report any penalty exceptions).

If you qualify for an exception to the penalty (for example, say $5,000 of your hardship was used for deductible medical expenses exceeding the AGI threshold, or you were totally and permanently disabled, etc.), you’d claim that exception on the tax form to avoid the 10% on that portion.

But hardship itself is NOT an exception – a critical thing to remember. Many folks assume “hardship” means no penalty – that’s not true. We’ll elaborate on that in the mistakes section, but keep in mind you likely owe that additional 10%. There’s no way to “pay back” a hardship withdrawal to avoid taxes; it’s a one-way withdrawal (unlike a loan, which you could repay).

9. Resume Contributions (Don’t Stop Saving): After taking a hardship withdrawal, you should, if financially possible, continue contributing to your 401(k). Under current rules, there is no suspension period – you can keep or restart deferrals right away. It’s wise to do so once you get past the emergency, so you can rebuild your retirement savings.

Also, your employer’s matching contributions (if any) should continue as normal on any new contributions; the hardship withdrawal doesn’t directly affect employer matches or your vested balance except that your total account is now reduced by the withdrawal.

That’s the step-by-step process. In summary: check eligibility, prepare proof, request only what you need, get approval, and be ready for the taxes/penalty. Next, we’ll discuss some common mistakes and pitfalls to avoid during this process, to ensure you don’t land in hot water or shortchange yourself.

🚫 Common Mistakes to Avoid with 401(k) Hardship Withdrawals

Even when you qualify for a hardship withdrawal, there are several pitfalls that can trip you up. Being aware of these mistakes will help you navigate the process more smoothly and avoid unnecessary costs or problems:

Mistake 1: Assuming “Hardship” Means Penalty-Free.
This is a big one: Many people believe that if the plan and IRS approve the hardship reason, they won’t owe the 10% early withdrawal penalty. This is false. Hardship withdrawals do not get a blanket exemption from the IRS early withdrawal penalty.

The penalty is waived only if the reason also falls under a specific penalty exception in the tax code. For example, large medical expenses could qualify for a penalty exception (to the extent they exceed 7.5% of your income), or if you become totally disabled the penalty is waived. But just being in a tough financial spot doesn’t erase the penalty.

A Tax Court case in 2024 (Caren Kohl v. Commissioner) underscored this point: the taxpayer took early 401(k) withdrawals citing financial hardship but was still held liable for the 10% additional tax because none of the statutory exceptions applied. In short, expect the 10% hit if you’re under 59½, and don’t let the term “hardship” mislead you. Plan for it in your withdrawal amount and in your finances.

Mistake 2: Not Using 401(k) Loans or Other Options First (if available).
While the IRS no longer requires taking a loan first, it’s often wise to consider a 401(k) loan or other avenues before a hardship withdrawal. A loan allows you to pay yourself back with interest and avoid taxes and penalties, keeping your retirement intact if you repay it.

A hardship withdrawal is permanent—you can’t put the money back, and you’ll pay income tax and penalty on it. If your need isn’t one of the IRS hardship categories (say to pay off debt or some other reason), a loan might be your only way to tap the 401k anyway.

Mistake: some employees don’t realize their plan offers loans, or they panic and take a hardship withdrawal when a loan could have solved it with much less long-term cost. Always evaluate: Can a loan, an IRA withdrawal (which has some different penalty exceptions), or other sources (home equity, etc.) cover this need instead? Only resort to the hardship withdrawal if it’s truly the last/best resort.

Mistake 3: Requesting More Money Than Necessary.
Remember, you are only allowed to withdraw the amount required to meet the need. If you inflate the amount in hopes of getting “extra” cash, the plan may deny or reduce it. For example, if your qualifying bills total $5,000 and you request $10,000 “just in case,” the administrator will likely flag that.

They might ask you to justify the excess (like for taxes), but if it’s clearly beyond what’s needed, they can’t legally approve it. Even if they somehow did, the IRS could later determine that distribution wasn’t strictly necessary, which could jeopardize the plan’s compliance.

Avoid fluff in your request – calculate a reasonable amount. Also, psychologically, some folks think “while I’m at it, I’ll take more out for cushion.” This hurts you in the long run by draining retirement funds and increasing your tax hit. Stick to actual needs.

Mistake 4: Not Submitting Proper Documentation or Information.
Incomplete or incorrect paperwork is a common reason for delays or denials. If the form asks for specific details (like account numbers, addresses, signatures), fill them out completely. Attach all requested proofs. If your documentation is ambiguous (e.g., a letter that doesn’t clearly say you’ll be evicted by X date unless Y amount is paid), you might need an additional note or explanation. Failing to provide the needed evidence will cause back-and-forth with the plan administrators.

Double-check everything before submitting: Did you sign the form? Did your spouse need to sign anything (some plans require spouse consent for any distribution, though hardship distributions are not typically subject to spousal consent unless your plan is oddly structured under certain annuity rules)? Does your employer need to sign? Are all pages of your bill/notice included? Taking care upfront can save weeks of delay.

Mistake 5: Forgetting the Tax Impact (or Not Withholding Enough).

When people see, say, $20,000 available in their 401(k) for hardship, they might assume they’ll get to use the full $20k. In reality, taxes will claim a chunk. By default, 20% federal tax withholding will reduce what you receive. If you didn’t anticipate that, you might end up short on the funds needed for the hardship! Conversely, if 20% isn’t actually enough to cover your eventual tax liability (maybe the withdrawal pushes you into a higher tax bracket, or you have state taxes), you could owe more at tax time.

Plan ahead: possibly request a slightly higher amount to cover taxes and penalties, or explicitly ask for higher withholding if you know 20% won’t cover it. One mistake is not realizing state taxes could apply; if your plan doesn’t auto-withhold state tax, you might need to make estimated payments. And be prepared that the distribution could increase your income such that less of other tax benefits (like credits or deductions) are available – meaning a bigger tax bill. Consulting a tax advisor or using a calculator before finalizing the amount is wise.

Mistake 6: Using the Hardship Withdrawal for Non-Approved Purposes (Dishonesty).

This isn’t common for honest folks, but it’s worth noting: You must be truthful about why you need the hardship withdrawal. Plans usually require you to certify that the information you provided is correct and the funds will be used for the stated need. If someone were to lie on a hardship application, it could be considered fraud.

There have been instances of legal action: In one case, an individual claimed a hardship withdrawal to buy a primary home and pay medical expenses, got the money, but then allegedly used it for other personal spending and even forged signatures on the application.

He was indicted for wire fraud and making false statements. 💣 Obviously, this is extreme, but it underscores: do not attempt to game the system or use a hardship withdrawal as a convenient cash grab for something that isn’t allowed. The IRS can audit hardship distributions and if a plan is found to have allowed improper ones, it can result in penalties for the employer and a headache for the participant.

Mistake 7: Ignoring the Long-Term Consequences.
It’s understandable to be fixated on the immediate crisis (that’s why you’re taking the money). But some people later regret not considering the future impact.

A hardship withdrawal permanently reduces your retirement savings. You lose not just the amount withdrawn, but all the compound growth it could have earned over the years until retirement. This can easily sum to tens of thousands of dollars less in your nest egg later.

Additionally, if you’re removing money during a market downturn, you might lock in losses. Or if you withdraw a large sum, you might fall behind on reaching your goal and never catch up. This isn’t so much a “procedural” mistake as a planning one: make sure the hardship withdrawal is absolutely necessary and worth the hit to your future financial security.

Consider alternative strategies: could you withdraw from a Roth IRA (contributions can be taken out tax-free and penalty-free) instead of raiding the 401k? Could you negotiate payments for the bill instead? Exhaust every better option, because the cost to your retirement is real. Don’t just assume you’ll replace the money later – many people don’t.

Mistake 8: Not Restarting Contributions Afterward.
Before 2019, if you took a hardship withdrawal, you were forced to stop contributing for 6 months (which was itself a regrettable outcome). That rule is gone now, but a mistake people make is effectively imposing their own long suspension – they get out of the habit of contributing, or their budget is tight after the hardship, so they never resume putting money into the 401k.

This means they also miss out on any employer match for that period, compounding the setback. To avoid this, as soon as you’re able, resume salary deferrals. Even if you start small and increase later, don’t neglect rebuilding. Some plans might automatically restart your contributions if you had an automatic enrollment, but don’t rely on that.

By steering clear of these mistakes – misunderstanding the rules, skipping better options, sloppy paperwork, tax blunders, and neglecting the future – you can execute a hardship withdrawal in the least damaging way possible. Next, let’s clarify some key terms and concepts that we’ve touched on, to ensure you fully grasp the jargon and elements involved in this topic.

📚 Key Terms and Concepts Explained (Hardship Withdrawal Glossary)

Navigating 401(k) hardship withdrawals involves a lot of specific terms and entities. Here’s a quick guide to the key terms, broken down in plain language:

• 401(k) Plan: A retirement savings plan offered by an employer, named after Section 401(k) of the Internal Revenue Code. Employees contribute a portion of their paycheck, often with a company match. There are Traditional 401(k) (contributions are pre-tax, taxed on withdrawal) and Roth 401(k) (contributions are after-tax, withdrawals can be tax-free if qualified). Hardship withdrawals can apply to either type, though tax treatment differs as noted.

• Hardship Withdrawal: An early distribution from a retirement plan, taken due to an immediate and heavy financial need. It is not a loan (you don’t pay it back) and it is generally subject to income taxes and possible penalties. Hardship withdrawals are only allowed under specific circumstances defined by the plan and IRS rules.

• Immediate and Heavy Financial Need: The IRS standard for hardships – essentially a pressing financial obligation or emergency that cannot be met through other means. “Immediate” means it’s currently occurring or imminent, and “heavy” means it’s a significant amount or serious situation (not a minor bill). For example, an eviction threat or large medical bill qualifies; wanting a luxury purchase or minor shortfall does not.

• Necessary to Satisfy the Need: This principle means you can only withdraw the amount required to address the hardship. Plans interpret this as including amounts needed to pay taxes on the distribution. You also must lack other resources (savings, insurance, reasonable liquidation of assets) to cover the expense. This often ties in with self-certification that you’ve exhausted alternatives.

• Plan Administrator: The person or entity responsible for running the 401(k) plan. This could be the employer’s HR/benefits office or a third-party company. The administrator approves distributions, ensures the plan’s rules are followed, and handles the paperwork. They are the ones who will review your hardship request. Sometimes the term Plan Sponsor (the employer) is used interchangeably when discussing who makes decisions about plan rules.

• Plan Document / Summary Plan Description (SPD): The official written rules of the 401(k) plan. It outlines what the plan allows, including whether hardship withdrawals are permitted and any specific procedures or limitations. The SPD is a more reader-friendly summary of the plan document provided to employees. If you need to know your plan’s hardship rules, the SPD is where to look first.

• Internal Revenue Service (IRS): The U.S. government agency that administers tax laws and retirement plan regulations. The IRS sets the rules for 401(k) plans, including hardship withdrawal criteria, through laws (Internal Revenue Code) and regulations. They also enforce the 10% early withdrawal penalty under tax code Section 72(t).

• ERISA (Employee Retirement Income Security Act): A federal law governing employer-sponsored retirement and benefit plans. ERISA requires plans to follow their written terms and to act in the best interest of participants. It’s why your plan can’t just make exceptions on a whim. ERISA also ensures that if a plan allows distributions, there are anti-discrimination rules (they can’t, for example, approve hardships for executives and deny rank-and-file if circumstances are similar).

• Safe Harbor (for Hardship Reasons): A set of predefined scenarios that the IRS has said automatically meet the “immediate and heavy” requirement. We listed them (medical, education, etc.). If a plan uses the safe harbor standard, it simply checks if your reason matches one on the list. This avoids subjective decisions. Plans can alternatively use a “facts and circumstances” test, but virtually all use the safe harbor for simplicity. The term “safe harbor” here means if the rule is followed (only allowing those reasons), the plan is deemed compliant.

• Elective Deferrals: The contributions you, as an employee, have chosen to put into the 401(k) from your paycheck. These are the funds typically eligible for withdrawal in hardship (along with other amounts if allowed). They are called “elective” because you elect (choose) to defer (delay receiving as cash wages) into the plan. They form the basis of your account, often along with employer contributions.

• 10% Early Withdrawal Penalty: A penalty tax equal to 10% of the distribution amount, imposed by the IRS on withdrawals from retirement accounts before age 59½ (unless an exception applies). It’s intended to discourage dipping into retirement savings too soon. This penalty is on top of regular income taxes. It’s formally called an “additional tax on early distributions” in the code (Section 72(t)). Common exceptions: death, disability, medical >7.5% AGI, age 55 and separated from service (for 401k only), etc. Important: “hardship” by itself is not one of these exceptions.

• Documentation (Proof of Hardship): The paperwork or evidence you provide to show your financial need. Examples include bills, notices, contracts, etc., as described earlier. Plans require this to ensure legitimacy of the request.

• Self-Certification: A process where the participant (you) certifies in writing that certain conditions are true – for hardship, typically that you have no other means to alleviate the hardship and that the need is legitimate. Recent regulations and the SECURE Act 2.0 have made it easier for plans to rely on employee self-certification instead of digging through your finances. But “self-certify” doesn’t mean you skip giving proof of the expense; it mainly refers to certifying you lack other funds and that the amount is necessary.

• Loan vs. Withdrawal: A 401(k) Loan is not a withdrawal; it’s borrowing money from your own account with a promise to repay it (usually with interest) back into the account. Loans have to be repaid within a certain time (usually 5 years, unless for home purchase) and there are limits (max $50k or 50% of balance). A Hardship Withdrawal is permanent – money out with no requirement or ability to return it. We often compare these as alternatives; loans avoid taxes/penalty but you must pay back or risk it becoming a taxable distribution if you default.

• Qualified Distribution (Roth): This term refers to a distribution from a Roth account that is tax-free because it meets certain conditions (Roth account aged 5+ years and you’re over 59½ or meet other criteria like death/disability). Hardship withdrawals from a Roth 401(k) usually are not qualified distributions (since they happen before 59½ typically), so only the portion attributable to contributions is tax-free, while earnings are not qualified and thus taxable/penalized.

• Primary Residence: When we mention this in hardship context, it’s the main home where you live. Many hardship reasons are tied to your primary residence (purchase, eviction, repairs). A second home or vacation property wouldn’t count for those.

By understanding these terms, you can better follow the rules and rationale behind each step of the hardship process. Next, let’s illustrate how all this comes together with some examples of common hardship scenarios, showing how a withdrawal would work out in each case.

Examples & Breakdowns: 3 Common 401(k) Hardship Withdrawal Scenarios

To make the concept of hardship withdrawals more concrete, let’s walk through three example scenarios that are among the most common reasons people seek a 401(k) hardship distribution. We’ll break down the specifics of each situation, including qualifications, amounts, taxes, and outcomes, in a table format for clarity.

Scenario 1: Major Medical Expense Emergency 💊

Imagine John, a 45-year-old employee, has a Traditional 401(k) and is facing a serious medical situation. His spouse needed emergency surgery that wasn’t fully covered by insurance.

In John’s case, the hardship withdrawal was approved since medical bills are a recognized hardship. He smartly accounted for taxes in his request. Also, because these were large medical expenses, John benefited from a partial break on the 10% penalty (medical expenses above the threshold are an exception). Many people in medical hardship might similarly avoid some penalty if the bills are huge relative to income, but even without that, the withdrawal was crucial to pay the hospital.

Scenario 2: Preventing Home Eviction 🏠

Now consider Maria, age 35, who rents an apartment. She recently lost her second job and fell behind on rent. She got an eviction notice stating she must pay the overdue rent or be evicted in 10 days.

Maria’s scenario shows the importance of documentation timing. She asked, “Can I take a hardship withdrawal before an eviction notice?” The answer is generally no – as we see, she needed that formal notice indicating eviction was imminent. Plans often require that language. Also, the example illustrates how taxes withheld can reduce what you get, so one must carefully calculate the gross amount to request. Maria just managed to pay the rent with some scrambling.

Scenario 3: College Tuition Payment 🎓

Finally, consider Alex, age 30, who is working and also attending night school for an MBA. He has a tuition bill due for the next semester and doesn’t have enough in the bank to cover it. He decides to use a hardship withdrawal to pay for school.

Alex’s scenario highlights a few things:

• 401(k) vs IRA differences: If he had $8k in a traditional IRA, he could withdraw that for education without a 10% penalty (IRS exception for higher education applies to IRAs, not 401ks). But funds often are in 401k and he might not have an IRA. One could do a rollover then withdraw, but that’s tricky last-minute. It shows that sometimes a 401k hardship is the only route even though another account would be more favorable.
• Importance of correct calculation: Alex asked for $8,800 but after 25% combined withholding, he got only $6,600. Ideally, he should have requested around $10,700 gross to net ~$8k (assuming 25% total withholding) so that the net met the tuition. Many people misjudge this, so the example is instructive.
• Ultimately, he paid for needed education, which is an investment in itself, but lost some retirement money and paid a penalty to do so.

These scenarios show real-world applications of hardship withdrawals:

• Medical: possibly penalty-mitigated, absolutely needed for health.
• Housing: preventing eviction or foreclosure – time-sensitive and critical for shelter.
• Education: voluntary but can be important; however, the cost of using 401k funds is steep given no penalty relief.

Each situation had different wrinkles (penalty exceptions, calculations, etc.), but all had to go through the formal hardship request process.

Pros and Cons of 401(k) Hardship Withdrawals

Before deciding on a hardship withdrawal, it’s wise to weigh the advantages and disadvantages. Here’s a clear look at the pros and cons:

In short, the pro of a hardship withdrawal is that it unlocks your retirement funds when you truly need them, potentially saving you from financial ruin or heavy outside debts. The con is that it’s costly (tax-wise) and undermines your retirement security. It’s a trade-off of short-term relief for long-term sacrifice. Ideally, one would only use this option when the pros (immediate necessity) clearly outweigh the cons.

Comparisons: Hardship Withdrawal vs Other Options 🔄

It’s important to put hardship withdrawals in context with other ways you might address a financial crunch using retirement funds or other resources. Let’s compare a few common alternatives:

401(k) Hardship Withdrawal vs. 401(k) Loan: This is the classic comparison.

• A 401(k) Loan lets you borrow money from your account (typically up to 50% of your vested balance or $50,000, whichever is less) and you must repay it with interest, usually through payroll deductions, within 5 years (longer if it’s used to buy a home). The interest goes back into your own account.
• A Hardship Withdrawal as we know is not repaid.

Key differences: A loan is not taxable when taken (no income tax, no penalty) as long as you pay it back on schedule. You essentially pay yourself interest. However, if you fail to repay (for example, you leave the company and don’t pay the remaining balance), the outstanding loan amount becomes a taxable distribution with penalties.

Loans also have to be available in your plan (most plans offer them). A hardship withdrawal, by contrast, is immediate permanent cash but triggers taxes/penalty right away.

When is a loan better? If you have the cash flow to repay it, almost always. It keeps your retirement intact (assuming no default) and avoids that big tax bite. For example, borrowing $10k and repaying over 3 years will cost you maybe a few hundred in interest that you pay to yourself, whereas withdrawing $10k could cost ~$2k+ in taxes and you never get that money back. Loans also don’t require a specific hardship reason – you can often take them for any reason (home improvement, etc.) without needing to “qualify” under IRS hardship categories.

When is a hardship withdrawal better? If you absolutely cannot afford loan payments or your need is such that adding a debt burden would make things worse. Also, if you lose your job or are in a very unstable situation, a loan can be risky (because if you separate, you usually have to pay it back quickly). And of course, if your plan doesn’t allow loans or you’ve maxed loans, then hardship might be the only option.

In summary: Loan = lower cost, but you must repay; Withdrawal = higher cost, but no repayment. Financial advisors typically recommend exploring the loan first for these reasons.

401(k) Hardship Withdrawal vs. IRA Withdrawal: If you have an IRA (Individual Retirement Account) in addition to a 401k, sometimes taking from the IRA is smarter. IRAs don’t have a hardship concept – you can withdraw any time for any reason (since it’s your personal account), but you still face the same taxes and 10% penalty if under 59½ unless you meet an exception.

The difference is the list of penalty exceptions for IRAs is a bit broader in some areas. For example, IRAs specifically allow penalty-free withdrawals for:

• Higher education expenses (tuition, etc.) for you, spouse, kids or grandkids.
• First-time home purchase (up to $10k).
• Health insurance premiums if unemployed. These do not apply to 401(k) distributions (except via hardship or other means, and hardship doesn’t waive penalty for education or home purchase). So, as we noted in Alex’s scenario, an IRA could have saved him the penalty for tuition.

However, many people’s main savings are in the 401k, not an IRA, and you might not have time or ability to roll over from 401k to IRA just to use the IRA exceptions (plus some exceptions like first-time home $10k are smaller than what you might need and rolling over while employed is often not possible unless you have an old 401k).

Also IRAs have no loan option at all. So if you have both, you have to consider taxes and penalties in each case. One strategy if you’re leaving a job or already left: roll a 401k into an IRA, then use IRA withdrawal exceptions if that suits your need better. But if you’re still employed, hardship might be the only way to get money out of the 401k plan.

Hardship Withdrawal vs. Early Distribution Without Hardship: This might sound odd, but one could just take an early distribution from a 401k if a distributable event occurs (like leaving the employer). If you left your job, you actually don’t need to prove hardship to withdraw your 401k – you can take it all out (not recommended due to taxes/penalty).

Hardship is a provision to withdraw while still employed and under 59½. So if you’re in-service and need money, hardship or a loan are your only in-plan options. If you separate from service at age 55 or older, there’s a special rule: no 10% penalty on 401k withdrawals after separation in or after the year you turn 55.

That’s not a “hardship” thing, it’s just a general rule. So someone age 55+ who loses their job can withdraw from the 401k without penalty at all – which might cover some hardship-like situations without needing to apply for hardship. That’s beyond the typical hardship scenario but good to know as a comparison (it highlights again that “hardship” is specifically for active employees needing money early).

Hardship Withdrawal vs. Personal Loans or Other Resources: If you can, often it might be better to find money elsewhere. For instance, some people take out a home equity loan or line of credit if they have a house, to cover an emergency, rather than tapping the 401k. Interest on a home equity loan might be lower and possibly tax-deductible, and you’re not diminishing your retirement.

Or borrowing from family (if feasible) could avoid the taxes and penalties (though it introduces other dynamics). Of course, these options have their own risks and may not be available or desirable, but they’re worth comparing. Hardship withdrawal should typically be one of the last resorts after evaluating these.

Let’s summarize a quick comparison chart of 401(k) Hardship vs 401(k) Loan vs IRA Withdrawal:

Each person’s situation is unique. If you have a workplace 401(k) and you’re in a bind:

• First, see if a loan could solve it without the downsides – if yes and you can manage repayments, that’s usually preferable.
• If a loan is not possible or not wise (maybe your job is unstable, or the payment would be too high, or the plan doesn’t allow loans), then see if your situation qualifies for a hardship withdrawal.
• If you also have an IRA, consider if using that (or a combination) might yield less penalty or easier access.

Always weigh the long-term cost. Sometimes talking to a financial advisor can help clarify which route leaves you better off.

Evidence & Precedents: Laws and Court Rulings on Hardship Withdrawals ⚖️

Hardship withdrawals have been shaped by laws and even occasionally tested in courts. Here we’ll touch on the legal framework and a notable precedent to give you a fuller picture of the “evidence” and authority behind these rules:

Legal Foundation: The allowance for hardship distributions comes from Treasury Regulations under IRC §401(k). Specifically, Reg. 1.401(k)-1 outlines hardship withdrawal provisions. Over time, updates like the final regulations in 2019 (following the Bipartisan Budget Act of 2018) eased some restrictions (removing loan-first and 6-month suspension rules, and adding the disaster reason).

The law essentially balances giving people access to funds in real need against the principle that retirement money should stay untouched for retirement.

ERISA Oversight: Because 401(k) plans are ERISA plans, the Department of Labor (DOL) also has an interest in ensuring plan fiduciaries follow the rules. If a plan were to grant a hardship withdrawal that is not allowed by the plan terms or IRS rules, that’s an operational failure.

The IRS could penalize the plan sponsor or even disqualify the plan if widespread (meaning the plan could lose its tax-favored status – a nightmare for the employer). To avoid this, plan administrators adhere strictly to the criteria.

There’s actually an IRS compliance guide listing hardship withdrawals not following plan terms as a common mistake that must be corrected via their EPCRS (Employee Plans Compliance Resolution System). Employers have to fix any improper hardship distributions (for example, if they accidentally gave one for a non-allowed reason, they might have to get the money back or make the plan whole).

Notable Court Case – No General Hardship Exemption: We already mentioned Caren Kohl v. Commissioner (Tax Court, 2024) in the mistakes section. It’s worth reiterating the essence: The taxpayer argued for relief from the 10% penalty due to hardship circumstances.

The Tax Court held that while her situation was sympathetic, the law does not provide a hardship exception to the penalty. The court essentially said: unless you meet a specific exception listed in §72(t) of the Internal Revenue Code, the penalty applies – hardship or not. This case is a recent reminder and is often cited by tax professionals to bust the myth that “hardship” avoids the penalty. It underscores the importance of planning for that cost.

Fraudulent Hardship Use – A Criminal Case: In an Ohio case (discussed in a 2022 compliance news report), an individual was indicted by a federal grand jury for allegedly making false representations on hardship withdrawal applications. He claimed the withdrawals (two of them) would be used for buying a primary home and for medical expenses – both legitimate reasons – but the government alleged he actually used the money for other purposes and even forged a plan official’s signature.

He was charged with wire fraud and making false statements. While this is an extreme case (and still an allegation at that point), it demonstrates that misusing the hardship provision can lead to serious legal consequences. It’s basically fraud against the plan and possibly the IRS if you lie about the reason.

Plan Sponsor Discretion Limits: There have been instances where employees felt their hardship withdrawal was unfairly denied and they’ve complained or even taken legal action. Generally, if you meet the criteria and have documentation, the plan shouldn’t deny it. If they do, you could raise the issue, and ultimately, the plan fiduciary must act prudently and follow the terms.

If they’re more restrictive than IRS rules (which they can be), those terms apply. For example, if your plan document doesn’t list funeral expenses as an allowed hardship and you request one for that reason, they must deny it even though the IRS would have allowed it if the plan did.

That’s not illegal; it’s the plan’s choice. But if a plan document allows something and an administrator capriciously denies it, that could be challenged as a breach of fiduciary duty or simply a mistake to be corrected. There’s not a lot of reported litigation on this because usually these things are resolved through internal processes or IRS audits rather than lawsuits by participants.

SECURE Act 2.0 (2022) Provision: The recent SECURE 2.0 Act has a section facilitating self-certification of hardship. Essentially, it directs that for plan years starting in 2023, employers can rely on an employee’s certification that they have an immediate and heavy financial need that qualifies and that the distribution is not more than necessary.

This is codifying what regs already allowed and encouraging simpler admin. The “evidence” here is legislative intent to make it easier for people to access hardship funds without jumping through excessive hoops, while still preventing abuse.

Data on Hardship Withdrawals: From an evidentiary standpoint, consider some statistics (these numbers are illustrative): In a given year, typically only a small percentage of 401(k) participants take hardship withdrawals – perhaps 2% or so, depending on the economy.

It tends to spike during times of widespread hardship. For instance, after natural disasters or in recessions, plans see more hardship requests. The IRS and Congress provided special provisions during the COVID-19 pandemic (2020) – not exactly called “hardship” but “Coronavirus-Related Distributions” (CRDs) – which allowed up to $100k withdrawal with no 10% penalty and the ability to spread the income over three years or even repay it.

This was an extraordinary measure, basically a temporary expansion of hardship access for COVID reasons. That expired, but it showed that in extreme situations, the government can ease the rules to let people use their retirement funds (with fewer penalties) for immediate needs.

State Law Protections: One more legal angle: 401(k) assets are generally protected from creditors in bankruptcy and lawsuits due to ERISA. If you withdraw the money, those protections vanish (the money becomes just cash you hold, which creditors could then potentially claim).

While not a court case, it’s a legal consideration: if someone had large debts and were considering hardship to pay them, they might want to talk to a lawyer because taking money out of a protected account to pay some creditors might expose it to others or not be the wisest move legally.

This is complex, but a footnote in thinking about “evidence and law” around hardships – sometimes keeping money in a retirement account is safer if you’re facing creditor claims, whereas withdrawing it could actually be detrimental.

All in all, the legal evidence supports that hardship withdrawals are tightly regulated and only to be used for true hardships. Courts will enforce the tax penalties if not qualified, and fraudulent use can lead to severe penalties. But when used correctly, the law is on your side to allow the withdrawal and give you relief in those specific scenarios life throws at you.

Frequently Asked Questions (FAQs)

Q: Can a 401(k) hardship withdrawal request be denied by the plan? – Yes. Your employer’s plan can deny a hardship withdrawal if you don’t meet the IRS criteria, lack proper documentation, or if the plan doesn’t allow that type of hardship. (Always check your plan’s rules.)

Q: Do I have to pay back a 401(k) hardship withdrawal later? – No. A hardship withdrawal is not a loan, so you don’t repay it to your 401k. It’s your money permanently taken out. However, you will owe taxes (and potentially penalties) on the distribution.

Q: Is a hardship withdrawal from a 401k penalty-free? – No, not generally. Taking a hardship withdrawal does not exempt you from the 10% early withdrawal penalty if you’re under 59½. You’ll pay that extra tax unless you qualify for a specific penalty exception like disability or high medical bills.

Q: Are 401(k) hardship withdrawals taxable? – Yes. Hardship withdrawals are treated as taxable income in the year taken (for traditional 401k funds). The only portion not taxed would be any after-tax or Roth contributions you withdraw. Expect mandatory 20% federal withholding upfront.

Q: Can I use a 401k hardship withdrawal to pay off credit card debt or loans? – No. Paying off consumer debt is not an allowed hardship reason under IRS rules. Hardship withdrawals are limited to certain needs like medical, eviction, education, etc., and credit card bills or general debt aren’t on that list.

Q: Will taking a hardship withdrawal hurt my credit score? – No. A 401(k) hardship withdrawal is not a loan and isn’t reported to credit bureaus. It’s your own money. So it won’t directly affect your credit score (unlike, say, defaulting on a loan which would).

Q: Can I withdraw from my Roth 401(k) for a hardship without paying taxes? – Yes and no. Roth 401(k) hardship withdrawals are partly tax-free: the portion from your original Roth contributions isn’t taxed. However, any earnings distributed will be taxable and usually subject to the 10% penalty if you’re under 59½, since it’s not a qualified distribution.

Q: Does my employer need to approve my hardship withdrawal request? – Yes. In most cases the plan administrator (often your employer or a service they use) must review and approve the request. They ensure it meets plan rules. They can’t approve outside of the allowed reasons, but they do need to sign off that your request is valid.

Q: After a hardship withdrawal, can I still contribute to my 401(k)? – Yes. Under current law, you can continue contributing with no mandatory break. (It used to require a 6-month pause, but not anymore.) In fact, you should keep contributing if you can, to rebuild your savings.

Q: Should I consider a 401k loan before a hardship withdrawal? – Yes. In many situations a loan is better since you avoid taxes and penalties by paying it back. If you can handle the loan payments, it’s usually a preferable first option and preserves your retirement funds long-term.

Q: Do I need to prove how I spend the hardship withdrawal money? – No. You won’t have to submit receipts showing you spent it on the hardship, but you do need to prove you had the qualifying expense/need at the time of the request. It’s wise to keep records of how the money was used in case of any future questions or audits.