Many workers count on their 401(k)s for the lion’s share of their retirement savings. That's why these employer-sponsored plans shouldn't be the first place you go if you need to make a major expenditure or are having trouble keeping up with your bills.

But if better options are exhausted—for example, an emergency fund or outside investments—tapping your 401(k) early may be worth considering.

Key Takeaways

  • The Bipartisan Budget Act passed in January 2018 issued new rules that make it easier to withdraw a larger amount as a hardship withdrawal from a 401(k) or 403(b) plan.
  • While the IRS sets general guidelines, provisions in each individual 401(k) plan determine whether hardship withdrawals are allowed and the specific conditions.
  • A 401(k) hardship withdrawal is not the same as a 401(k) loan.
  • You may have to pay a 10% penalty if you use the money for the purchase of a new home, education expenses, prevention of foreclosure, and burial expenses.
  • One big downside of hardship withdrawals is that you can't repay the money back into your plan.

How 401(k) Hardship Withdrawals Work

A hardship withdrawal is an emergency removal of funds from a retirement plan, sought in response to what the IRS terms "an immediate and heavy financial need." It's actually up to the individual plan administrator whether to allow such withdrawals or not. Most—though not all—major employers do this, provided that employees meet specific guidelines, and present evidence of the hardship to them.

According to IRS rules, a hardship withdrawal lets you pull money out of the account without paying the usual 10% early withdrawal penalty charged to individuals under age 59½. The table below summarizes when you owe a penalty and when you do not.






Medical expenses


No (if expenses exceed

7.5% of AGI)


Permanent disability




Substantial equal periodic payments (SEPP)




Separation of service




Purchase of principal residence




Tuition and educational expenses




Prevention of eviction or foreclosure




Burial or funeral expenses



A 401(k) hardship withdrawal isn't the same as a 401(k) loan, mind you. There are a number of differences, the most notable one being that hardship withdrawals do not allow money to be paid back into the account. You’ll be able to keep contributing new funds to the account, however.

Bipartisan Budget Act Changes

As for accessibility, there is some good news: The Bipartisan Budget Act passed in January 2018 issued new rules that will make it easier to withdraw a larger amount as a hardship withdrawal from a 401(k) or 403(b) plan. 

  1. The old rule, which was retired in 2019, stipulated that you could only withdraw your own salary deferral contributions—the amounts you had withheld from your paycheck—from your plan when taking a hardship withdrawal.
  2. The rule that states you could not make new contributions to your plan for the next six months also expired in 2019. With the new rules, you can continue contributing to the plan and also be able to receive employer matching contributions

An additional change for 2019 is that you won’t be required to take a plan loan before you become eligible for a hardship distribution. However, whether or not you will be allowed to take a hardship distribution is a decision that still remains with your employer. Your employer may also limit the uses of such distributions, such as for medical or funeral costs, as well as require documentation.

Although a hardship withdrawal often avoids the 10% penalty, it still incurs income taxes on the sum you withdraw.

6 Tests for a 401(k) Hardship Withdrawal

The six tests for a hardship withdrawal did not change with the new law. Hardship withdrawals are permissible due to a heavy financial need from the following:

  1. Medical care or medical costs
  2. Purchase of a principal residence
  3. Post-secondary education
  4. Preventing the foreclosure of a principal residence or eviction
  5. Funeral or burial expense
  6. Repairs to a principal residence due to a casualty loss that would have been tax-deductible under Section 165 of the Internal Revenue Code

From 2018 to 2025, the Tax Cuts and Jobs Act declared such losses are not tax-deductible except in specified federal disaster areas. It should be noted that the Tax Cuts and Jobs Act also reduced the threshold for individuals deducting for medical expenses to those that exceed 7.5% of adjusted gross income (AGI) for 2017 and 2018. However, that threshold rose back to 10% of AGI, starting in the 2019 tax year.

The Employer's Role

The conditions under which hardship withdrawals can be made from a 401(k) plan are determined by the provisions in the plan document—as elected by the employer. Speak to a human resources representative at your workplace to find out the specifics of the plan.

You may want to ask the plan administrator or the employer for a copy of the summary plan description agreement (SPD). The SPD will include information about when and under what circumstances withdrawals can be made from your 401(k) account. You can also ask to be provided with an explanation in writing.

Paying Medical Bills

Plan participants can draw on their 401(k) balance to pay for medical expenses that their health insurance does not cover. If the unreimbursed bills exceed 7.5% of the individual’s adjusted gross income (AGI), the 10% tax penalty is waived.

To avoid the fee, the hardship withdrawal must take place in the same year that the patient received medical treatment. Again, in 2019 the amount you can take out will no longer be limited to your elective contributions, minus any previous distributions sum.

Living with a Disability

If you become “totally and permanently” disabled, getting access to your retirement account early becomes easier. In this case, the government allows you to withdraw funds before age 59½ without penalty. Be prepared to prove that you’re truly unable to work. Disability payments from either Social Security or an insurance carrier usually suffice, though a doctor's confirmation of your disability is frequently required. 


Penalties for Home and Tuition Withdrawals




SEPPs When You Leave an Employer

If you’ve left your employer, the IRS allows you to receive “substantially equal periodic payments (SEPPs)” penalty-free—though they're technically not hardship distributions. One important caveat is that you make these regular withdrawals for at least five years or until you reach 59½, whichever is longer. That means that if you started receiving payments at age 58, you’d have to continue doing so until you hit 63.


Calculating the Withdrawal Amount

There are three different methods you can choose for calculating the value of your withdrawals:

  1. Fixed amortization, a fixed schedule of payment
  2. Fixed annuitization, a sum based on annuity or life expectancy
  3. Required minimum distribution (RMD), based on the account's fair market value


Separation of Service

Those who retired or lost their job in the year they turned 55 or later have yet another way to pull money from their employer-sponsored plan. Under a provision known as “separation of service,” you can take an early distribution without worrying about a penalty. However, as with other withdrawals, you’ll have to be sure you can pay the income taxes.


Another Option: A 401(k) Loan

If your employer offers 401(k) loans—which differ from hardship withdrawals—borrowing from your own assets may be a better way to go. Under IRS 401(k) loan guidelines, savers can take out up to 50% of their vested balance, or up to $50,000 (whichever is less). One of the advantages of a loan is that the plan participant isn’t forced to pay income taxes on it that same year, nor does it incur that early withdrawal penalty.

Be aware, however, that you have to repay the loan, along with interest, within five years (ensuring that your retirement fund doesn't get depleted). If you and your employer part ways, you have until October of the following year—the ultimate deadline (with extension) for filing tax returns—to repay the loan.

The Bottom Line

If employees absolutely need to use their retirement savings before age 59½, 401(k) loans are ordinarily the first method to pursue. But if borrowing isn’t an option—not every plan allows it—a hardship withdrawal may be a possibility for those who understand the implications. One big downside is that you can't pay the withdrawn money back into your plan, which can permanently hurt your retirement savings. As such, a hardship withdrawal should only be done as a last resort.

Examine your workplace plan, and take note of which situations would institute a 10% penalty and which won't. This may make the difference between a smart method of getting cash or a smashing blow to your retirement nest egg.