Typically, you cannot take a distribution from your 401(k) plan without penalty, however, some 401(k) plans offer an exception in the event of an immediate and heavy financial need. In general, a hardship withdrawal can be taken only after exhausting all other external and in-plan options including loans and in-service distributions, and cannot be paid back to the plan.
The withdrawal itself must be limited to the size of the need (including taxes and 10% penalties), and the IRS has identified qualified expenses for the employee, the employee’s spouse, dependents or beneficiaries:
- Qualified medical expenses
- Costs related to purchase of principal residence (for employee only, excludes mortgage payments)
- Tuition, education or room and board
- Funeral expenses
- Costs to repair damage to principal house
- To prevent eviction or foreclosure of primary residence
It is important to note that you will be taxed on the withdrawal, and if you take the distribution before the age of 59 ½, there is a 10% withdrawal penalty.
Please contact firstname.lastname@example.org to see if your 401(k) plan offers hardship withdrawals as well as your employer’s process for administering this distribution. It is important to consult the IRS guidelines and/or a financial professional regarding loans and early distributions.
The information in this section is provided by Betterment LLC, a registered investment advisor.