How does a 401(k) hardship withdrawal work and is it smart to take one?

The funds you stash in your 401(k) plan are intended for your future retirement. But sometimes life throws you a curveball, and you need money fast. In those cases, you may be able to tap into your 401(k) through a hardship withdrawal.

Increasingly, Americans are turning to this option when they are in a pinch. In 2024, a "record 4.8% of workers in 401(k) plans took a hardship distribution for financial emergencies, up from a prepandemic average of about 2%," said The Wall Street Journal, citing Vanguard Group. But just because the money is there, does not necessarily mean that it is a good idea to take it.

How do 401(k) hardship withdrawals work?

A hardship withdrawal allows you to take money out of your 401(k) plan specifically to cover a dire financial need. This is not to be confused with a 401(k) loan, "which is repaid with interest," said Investopedia. By contrast, "you cannot repay money taken for a hardship withdrawal back into your 401(k) account."

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You will, however, pay income taxes on the amount withdrawn. You may also owe a 10% early withdrawal penalty if you make the withdrawal when you are under the age of 59½. Though this penalty is waivable in some circumstances, it is good to remember that "you may qualify for a hardship distribution but still have to pay the 10% bonus penalty," said Bankrate.

When can you take a hardship withdrawal?

Under IRS rules, to be considered a hardship, the event "must pose 'an immediate and heavy financial need,'" such as certain medical expenses, total and permanent disability or home repair costs following a natural disaster, said Bankrate. Further, the IRS "demands that the 401(k) withdrawal is the last resort," meaning that "if an individual has other assets to meet the need," those resources "must be used first," said the outlet.

It is also important to note that "individual plans will have different rules about whether and when such withdrawals are permitted," and "some plans may not allow hardship withdrawals at all," said Investopedia.

What should you consider before taking a hardship withdrawal?

Perhaps the biggest drawback of a hardship withdrawal is that if you take out the funds, "you lose out on the amount saved and the additional interest that could have accumulated in the account for retirement," said U.S. News & World Report. As such, while you may be helping yourself out now, you are setting yourself back down the road, as you will not have that amount saved for retirement.

There are also specific rules around hardship withdrawals that you will have to navigate. "Hardship withdrawals must stay within the limits of the actual financial hardship, however that's defined by the plan," and your withdrawals may be limited "to your own contributions," said Bankrate. Further, only in specific circumstances will you avoid the early withdrawal penalty, which, when combined with the income tax you will owe, can significantly cut into the funds you actually get.

Given these downsides, it is worth considering all of your alternatives before resorting to a hardship withdrawal.