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Hardship Withdrawals

If you have maxed out on 401(k) loans and you have an urgent financial need, you may be able to take a hardship withdrawal from your employer’s plan. Hardship withdrawals are typically allowed for unreimbursed medical expenses, college bills and funeral expenses, to prevent foreclosure or eviction, or to buy or repair your principal residence. Similar rules apply to 403(b) plans.

While hardship withdrawals are legally permissible, your employer isn’t obligated to allow them. Moreover, you may have to jump through various hoops, such as documenting your financial need.

With hardship withdrawals, the real hardship may be the cost involved. You will have to pay income taxes on the sum withdrawn, plus a 10% tax penalty if you are under age 59½. If you’re in the 25% tax bracket, a $10,000 withdrawal could leave you with just $6,500 to spend after federal taxes and penalties, and even less if you have to pay state income taxes. In addition, you may be barred from making contributions to your 401(k) for the next six months.

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