Can You Just Withdraw Money From Your 401(k) Without Having a Hardship?

Can You Just Withdraw Money From Your 401(k) Without Having a Hardship?
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The government Investor website describes the 401 (k) as an employer-sponsored retirement plan. And the purpose of this employer-sponsored 401(k) plan is to help employees save and invest for their later years.

Employees and employers can contribute pre-tax money into the employee’s 401(k) account up to the annual limits set by law. Currently, the IRS has set that limit to $20,500. However, if you are 50 years or older, you can contribute an additional ​$6,500​.

The plan postpones taxes on the contributions and earnings until you, as an employee or ex-employee, withdraw the money. Hardship is one of several reasons that the Internal Revenue Service lists as permissible reasons to withdraw 401(k) money.

Allowed 401 (k) Distributions

Can you cash out your 401(k) without paying a heavy price for doing so? Yes, you can.

Withdrawing from 401 (k) without penalty is possible. Usually, money can be distributed from your 401(k) if you die, retire, reach age 59 1/2, become disabled or in some other way no longer work for your employer. You can also cash out your account if you employer ends the plan without providing a replacement plan. Also, reservists called to active duty for at least ​180 days​ can tap their 401(k) accounts.

Hardship distributions are possible for a number of reasons, but the IRS places conditions on the use of this method to access you plan funds. You must fork over regular taxes on all distributions and your employer will usually withhold ​20 percent​ for taxes.

If you are younger than 59 1/2, you might have to pay a 10 percent​ early withdrawal penalty unless you qualify for an exception, such as a disability, medical debt, divorce-related court orders, reservist active duty, an IRS levy, or leaving employment after age 55.

Broad Range of Hardships

You may not realize that the purpose of your withdrawal might be allowable as a financial hardship. For example, you can use hardship money to buy or repair your home or pay the doctor.

According to the IRS "Safe Harbor" rules, six circumstances exist that determine if the financial need for a hardship distribution is immediate and heavy. They are:

  • Medical expenses for you, your spouse, beneficiaries, and dependents
  • Purchasing costs for your principal home, excluding regular mortgage payments
  • Up to one year’s qualified post-secondary education expenses for you or a family member
  • The rental or mortgage costs on main home in order to prevent eviction or foreclosure
  • Money for burial or funeral expenses for a parent, spouse, child or certain other dependents
  • Costs related to fixing the damage to your main home.

The regulations give the Internal Revenue Commissioner some wiggle room to permit hardship distributions for other extraordinary circumstances. However, you can’t get a hardship distribution once your job has terminated.

Immediate and Necessary

For your employer to grant a hardship distribution, you must show that you require the money to satisfy a heavy, immediate and necessary need. And for 401(k) withdrawal rules hardship to apply, your employer must rely on objective and nondiscriminatory standards to determine whether you meet the hardship distribution requirements.

The rules give an example. Paying for a family member’s funeral can be a financial hardship, but the purchase of a boat or television doesn't qualify. The need for the money might arise from an emergency, but also can qualify for hardship distribution even if you could foresee the need or if it is due to a voluntary action.

Limitations on Hardship Distributions

Even if you have a hardship that qualifies for a 401(k) distribution, you can only siphon off the amount needed to satisfy the financial need, including any taxes or penalties arising from the distribution. Also, you must show you have no other available resources, such as a vacation home, insurance proceeds, a 401(k) plan loan or a commercial loan, that you could apply to the financial need.

Generally, you can withdraw only your own contributions, not earnings or employer contributions. If you receive a hardship distribution, you must wait at least six months before you can contribute to any of the employer’s retirement plans. You can’t roll over a hardship distribution into an Individual Retirement Account (IRA) or other qualified retirement plan.