If you're facing a financial emergency, you might be wondering: What is a hardship withdrawal and should I take one? A hardship withdrawal is an early withdrawal from certain retirement accounts, like a 401(k) or 403(b), to cover an immediate and heavy financial need. Think medical bills, avoiding foreclosure, funeral costs or repairing your main home after a disaster.
The catch? You'll owe ordinary income tax on the money you take out and, if you're under 59½, a 10% early withdrawal penalty, unless you qualify for an IRS exception. That's why understanding the rules before you dip into your nest egg is critical.
A hardship withdrawal is a permanent distribution from a retirement plan due to an urgent financial need.
Key Facts:
According to Fidelity, the average hardship withdrawal in 2023 was about $5,500, with avoiding foreclosure and paying medical bills among the top reasons.
The IRS requires two things:
Not all employer plans allow hardship withdrawals. About 15% of plans don't offer them at all. Always check with your HR department first.
Here are some of the taxes and penalties you'll need to pay if you're considering an early withdrawal.
Hardship withdrawals are taxed as ordinary income in the year you take them. Large withdrawals could push you into a higher bracket.
If you're under 59½, expect a 10% penalty, unless you meet exceptions like:
IRS data shows Americans paid over $5.7 billion in early withdrawal penalties in 2022. That's money that could have stayed invested for retirement.
Vanguard estimates that pulling $10,000 from your 401(k) at age 45 could mean losing more than $40,000 in potential retirement savings by age 65 (assuming 7% annual growth).
It's fair to say that money is tight for many these days. A 2023 Federal Reserve report found that 37% of U.S. adults would struggle to cover an unexpected $400 expense without borrowing or selling something. While dipping into your savings might seem like a viable option, it's vital to avoid it if at all possible.
Before touching retirement funds, consider:
According to Vanguard, only 1.2% of 401(k) participants took a hardship withdrawal in 2022, showing it's usually a last-resort move. If you do need to pull some of that money, however, here are some ways to minimize the damage:
A hardship withdrawal can be a financial lifeline in a crisis, but it comes at a cost: taxes, penalties and lost future growth. If you're considering one, explore all other options first, like loans, emergency funds or payment deferrals. And if you do take one, withdraw only what's necessary and have a plan to rebuild your savings.
If you're considering it, first ask yourself:
For more strategies to protect your retirement savings, check out our guide to retirement planning after 50.