If you've got a financial emergency, a 401(k) hardship withdrawal may be your only choice to resolve it. If you need to make a 401(k) hardship withdrawal, check your 401(k) rules for the specifics of your plan.
Who is eligible for a 401(k) hardship withdrawal?
Not all 401(k) plans offer 401(k) hardship withdrawals. However, many plans with elective coverage permit you to make 401(k) hardship withdrawals under very strict rules. If you're not sure whether your plan permits 401(k) hardship withdrawals, examine your 401(k) rules or check with your plan administrator. However, chances are good that if your 401(k) offers loans, you can probably also make a 401(k) hardship withdrawal.
What are the criteria for a 401(k) hardship withdrawal?
The criteria for a 401(k) hardship withdrawal may vary from plan to plan, but most plans typically follow the Internal Revenue Code for 401(k) hardship withdrawals. First, in order to qualify for a 401(k) hardship withdrawal, you must be unable to get the money anywhere else, including loans. If you are eligible for a 401(k) loan, you probably won't qualify for a 401(k) hardship withdrawal, unless you already have an outstanding 401(k) loan.
401(k) hardship withdrawals are based on demonstrated financial need for yourself, your spouse or your dependents. The guidelines covering the types of financial needs generally include needing money to repay medical bills; money to purchase or repair a primary residence; money for college tuition, housing or expenses; or money to save your home if you're facing eviction or foreclosure. You can only withdraw the amount required to cover your expense and any 401(k) hardship withdrawal fees or penalties; you can't withdraw extra money for non-covered expenses.
Differences between a 401(k) loan and a 401(k) hardship withdrawal.
If you must take money from your 401(k), a 401(k) loan is far preferable to a 401(k) hardship withdrawal. You cannot repay money you take as a 401(k) hardship withdrawal, and you may be prohibited from making contributions to your 401(k) plan for six months following the withdrawal. Further, with a 401(k) hardship withdrawal, you must pay taxes on the money withdrawn, and you typically face an early-withdrawal penalty of 10%. If you get a 401(k) loan instead of a 401(k) hardship withdrawal, you can repay the money to your 401(k), you don't face taxes or an early withdrawal penalty, and you typically aren't restricted by the same guidelines regarding demonstrating financial need.
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