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

The purpose of an employer 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. 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.

Money can be distributed from your 401(k) if you die, retire, reach age 59 ½, become disabled or in some other way no longer work for your employer. You can also cash in your account if you employer ends the plan without providing a replacement plan. 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 rules place 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.

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. The rules set out in the Code of Federal Regulations, Title 26, Section 1.401(k)-1, list six circumstances in which the financial need for a hardship distribution is immediate and heavy. They are: (1) encountering deductible medical costs; (2) purchasing your principal home, excluding mortgage payments; (3) paying up to one year’s qualified education expenses for you or a family member; (4) coughing up the rent or mortgage on your main home in order to prevent eviction or foreclosure; (5) shelling out money for burial or funeral expenses for a parent, spouse, child or certain other dependents; and (6) repairing deductible damage to your main home. The regulations give the Internal Revenue Commissioner some wiggle room to permit hardship distributions for other extraordinary circumstances. You can’t get a hardship distribution once your job has terminated.

For your employer to grant a hardship distribution, you must show that you require the money to satisfy a heavy, immediate and necessary need. 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.

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. 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 or other qualified retirement plan.