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Taking money out of your 401(k)
What is a hardship withdrawal and how do I apply?
Updated over a week ago
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While you typically can’t access money from your 401(k) until you reach age 59 ½ or leave employment, the IRS allows hardship withdrawals for “immediate and heavy” financial needs in certain circ*mstances.
When you take a hardship withdrawal, you’ll be subject to income taxes, plus an additional 10% tax for early distribution unless you qualify for a penalty exemption. And unlike a 401(k) loan, you cannot repay the amount back to your account. The amount of your hardship withdrawal is also not eligible for rollover to another retirement plan or IRA. As a result, it will permanently reduce the value of the benefits you have saved for retirement.
Still, if you qualify, a hardship withdrawal can be an essential resource to help you overcome financial needs.
To be eligible for a hardship withdrawal, you must have an immediate and heavy financial need that cannot be fulfilled by any other reasonably available assets. This includes other liquid investments, savings, and other distributions you are eligible to take from your 401(k) plan.
The Guideline 401(k) plan recognizes the following circ*mstances as eligible for a hardship withdrawal:
Some medical care expenses (as described in Section 213(d) of the Internal Revenue Code) for you, your spouse, your primary beneficiary or your dependents.
Costs directly related to the purchase of your principal residence, excluding mortgage payments.
Tuition, educational fees, and room and board expenses for the next 12 months of post-secondary education for you, your spouse, your primary beneficiary or your dependent.
Required payments to prevent your eviction from or foreclosure on your principal residence.
Payments for burial or funeral expenses for your deceased parent, spouse, children, primary beneficiary or other dependents.
Expenses to repair damage to your principal residence that would qualify for the casualty deduction.
Costs directly related to losses from a federally declared emergency at your primary residence or place of work.
When taking a hardship withdrawal, the following rules will also apply:
The minimum amount you can request is $1,000. If your vested account balance is less than $1,000 you will not be able request a hardship distribution.
You can receive no more than two hardship distributions during a plan year (calendar year for all Guideline 401(k) plans).
The amount requested may not be more than the amount needed to relieve your financial need, but can include any amounts necessary to pay taxes or penalties reasonably anticipated.
You are currently employed with the company sponsoring the plan and are under age 59 ½.
The portion of your hardship withdrawal taken from your pre-tax account balance will be included as taxable income for the year you took the distribution. Additionally, unless you qualify for a penalty exemption, the full amount of the hardship withdrawal will be subject to an additional 10% penalty tax.
Unlike most other distributions from a 401(k) plan, hardship withdrawals are not eligible to be rolled over to another retirement plan or IRA. Because they are not eligible for rollover, you will be given the option if and how much federal tax you want withheld from your distribution. You should consult with a tax advisor when determining your withholding rate as withholding too little may result in underpayment penalties when you do to file your taxes for the year.
You can submit a request for a hardship withdrawal directly from your Guideline dashboard. Once you’re logged in, click on the Transfers option in the main menu, then access the Hardship withdrawals page to access the application.
Please note this page will only be accessible if you do not have any pending applications.
Once you submit your hardship withdrawal application, it will be reviewed. Generally this takes less than a day. However, if there are any questions about your application, additional review time may be needed. Typically, this further review takes 5-7 business days.
You’ll receive an email notification to let you know if you’re approved. If approved, you’ll also receive a final notice when your funds are on the way.
Please expect about 7-10 business days to receive checks through USPS mail. If you elected to receive the funds via direct deposit or ACH, please allow 2-3 business days for the funds to settle in your bank account.
You will not need to submit any documentation with your application to prove that you meet all of the qualifications to take a hardship withdrawal. As part of the application, you will certify that you meet all of the requirements to receive a hardship withdrawal.
You will be responsible for saving any documentation necessary to prove that you met the requirements (e.g., bills, invoices, legal documents) and providing such documentation in case of an IRS audit.
If you do not meet the requirements or regulations of a hardship withdrawal, you may qualify for a 401(k) loan. You can learn about 401(k) loan eligibility here.
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