401(k) Hardship Withdrawals

by Paul R. Ruedi, CFP®

401(k) hardship withdrawals enable a person to access some of the money in their 401(k) plan in the event of some sort of financial hardship. But this money is not without strings attached. Those who take 401(k) hardship withdrawals still have to pay taxes on any untaxed money in the distribution, and those under 59 ½ will usually pay a 10% early withdrawal penalty. Despite this, the number of people taking hardship withdrawals reached a new record high in 2025 according to recent data from Vanguard.

Per the IRS website, a 401(k) hardship withdrawal can be taken due to an “immediate and heavy” financial need. Their website specifies that consumer purchases do not count as immediate and heavy financial needs, and in most cases credit card debt will not count either. However, it does state “A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.” Though you can’t use a hardship withdrawal to spend recklessly, it appears you can use it to correct problems that arise as a result of your own mistakes.

The IRS provides six “safe harbor” situations in which the withdrawal automatically applies as covering an immediate and heavy financial need. Those include medical expenses, costs related to the purchase of a home (but not a mortgage), tuition and certain educational expenses, payments to prevent an eviction or foreclosure on a primary residence, funeral expenses, and certain expenses relating to damage of a primary residence.

The ability to take a hardship withdrawal is at the discretion of the employer and savers cannot withdraw more than the dollar amount of the hardship. Many employers require that savers must have exhausted all other options to distribute money or take a loan from the plan before taking a hardship withdrawal. Many employers require documentation that the employee has insufficient cash or other funds available to help with the hardship.

Taking a hardship withdrawal halts the compound growth of a portion of your retirement savings. You will have to pay taxes on any untaxed money eventually, but taking a hardship withdrawal requires you to pay them sooner. On top of that, you may have to pay early withdrawal fees.

As you can tell, there are a lot of downsides to taking a hardship withdrawal. But if the situation is dire and you really need to take one, you have to do what you have to do. If you are struggling with the decision to take a hardship withdrawal, I’d highly recommend talking to a financial planner.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.