Yes, you can take a 401(k) hardship withdrawal to pay for certain qualifying expenses, including the federal, state, and local taxes and penalties on the withdrawal itself, but it's costly: the money is taxed as ordinary income, incurs a 10% penalty if you're under 59½ (with few exceptions), permanently reduces your retirement savings, and you're banned from contributing for 6 months. The amount must be strictly limited to what's needed for the hardship plus taxes, and you must exhaust other options first.
You can withdraw only the amount necessary to cover your financial need. If your circumstance qualifies for a 401(k) hardship withdrawal, you can only withdraw the amount of money needed to cover that expense, plus enough for income taxes on the withdrawal.
Yes, the IRS can take your 401(k) or other retirement funds in order to satisfy outstanding taxes. However, if you have a current or pending repayment plan in order, they are not authorized to impose a tax levy on your 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.
IRS hardship reasons generally fall into two categories: 401(k) hardship withdrawals for "immediate and heavy financial needs" (like medical bills, home purchase/foreclosure prevention, funeral costs, or education) and tax debt hardship (inability to pay taxes due to inability to meet basic living expenses, long-term unemployment, or disability). For retirement plans, the IRS provides "safe harbor" reasons, including unreimbursed medical expenses, principal residence purchase/repair/foreclosure prevention, funeral expenses, and postsecondary education costs, plus expenses from FEMA-declared disasters.
One-time forgiveness, officially known as First-Time Penalty Abatement (FTA), is an IRS program that allows qualified taxpayers to have certain penalties removed from their tax accounts.
The IRS allows you to withdraw from certain accounts if you are experiencing financial hardship. Theoretically, you would need to have documentation proving that you meet its criteria in the case of an IRS audit. How often does the IRS audit hardship withdrawals? Not often, but preparing for one is still a wise idea.
A 401(k) hardship withdrawal is an early withdrawal for an "immediate and heavy financial need," typically for IRS-defined reasons like major medical expenses, funeral costs, tuition, preventing eviction/foreclosure, major disaster losses, or buying/repairing a principal residence, but it's taxed and often incurs a 10% penalty if you're under 59½, though some disaster/medical situations may avoid penalties.
To avoid the 22% tax bracket (or any higher bracket), focus on reducing your taxable income through strategies like maxing out 401(k)s and HSAs, deferring bonuses, tax-loss harvesting, smart charitable giving, and strategic asset location, understanding that higher rates only apply to income within that bracket, not your entire income.
If you owe the IRS
If you owe unpaid taxes and the IRS puts a levy on your IRA or 401(k) to collect payment, you can make a penalty-free withdrawal from your retirement account to pay the debt.
You must pay income tax on any previously untaxed money you receive as a hardship distribution. You may also have to pay an additional 10% tax, unless you're age 59½ or older or qualify for another exception. You may not be able to contribute to your account for six months after you receive the hardship distribution.
If you're still employed, your employer will usually know about 401(k) loans and hardship withdrawals because they help administer the plan and must approve those requests. Other types of withdrawals may not require approval, but can still appear in reports your employer receives.
The SECURE 2.0 Act has made it possible for participants to take a withdrawal when they may need it most. Allows eligible participants to take one self-certified, penalty-free withdrawal of up to $1,000 per calendar year for unforeseeable or immediate financial needs relating to personal or family emergency expenses.
People do this for many reasons, including: Unexpected medical expenses or treatments that are not covered by insurance. Costs related to the purchase or repair of a home, or eviction prevention. Tuition, educational fees and related expenses.
No penalties, as long as loan is paid back within five years or before you leave your employer; otherwise it is in default and considered a distribution so you pay taxes and a 10% penalty if you're under age 59½. Generally no credit check needed, and no impact on credit score.
That being said, it's important to be aware of “triggers” for IRS audits, below is a list of some of the more egregious items.
When you take a distribution from your 401(k), your retirement plan will send you a Form 1099-R. This tax form shows how much you withdrew overall and the federal and state taxes withheld from the distribution if applicable. This tax form for 401(k) distribution is sent when you've made a distribution of $10 or more.
If you decide you take a hardship withdrawal, you may not be able to contribute to your workplace retirement plan for six months or more. The IRS also prohibits you from withdrawing more than you need to cover the hardship plus local, state and federal income taxes or penalties.
Hardship payments are for people facing immediate, severe financial crises like job loss, sudden illness, natural disasters, eviction, or high medical bills, with eligibility depending on the specific program (IRS, lender, government aid) and requiring proof of income, expenses, and the "undue hardship" of the situation, often needing documentation like pay stubs or medical records. Key factors for qualification include low income, limited assets, and demonstrating a temporary inability to meet basic needs or debt obligations due to an unforeseen event.
APR range: 11.69%-35.99%. Loan amounts: $1,000-$50,000. Minimum credit score: 560.