The maximum amount for a retirement plan loan (often called a hardship loan) is generally the lesser of 50% of your vested account balance or $50,000, with an exception allowing up to $10,000 if 50% is less than that. For true hardship withdrawals (not loans), the amount is limited to the documented financial need, including taxes/penalties, and not tied to the $50k limit, but these are taxable and often penalized.
The main difference between 401(k) hardships and 401(k) loans is your ability to repay. In most cases, the loan amount will be limited to $50,000 (or 50% of your balance), and you'll need to repay the money within five years at a low interest rate.
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.
Most personal hardship loans are unsecured, which means you don't need to own something valuable that you could borrow against. You typically qualify based on your creditworthiness and financial situation. Lower credit scores might be okay. If you're experiencing a hardship, your credit score might have suffered.
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.
Flexible use: You can use the funds from a hardship personal loan for almost anything, including paying your living expenses.
Beyond financial records, additional evidence like medical bills, eviction notices, or employer letters can reinforce your argument for hardship. These details provide essential context to your situation, showing how unexpected events have impacted your financial stability.
You can apply for a hardship loan from a bank, credit union, or online lender. Some lenders let you prequalify first, meaning you can check your rates without impacting your credit. If the lender approves your official loan application, it can often issue your funds the same day or the next day.
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.
How much you'll get. The hardship payment is roughly 60% of the amount you were sanctioned by in the last month. If you're still struggling to cover your costs, there may be other ways to get help with living costs while you're on a sanction.
APR range: 11.69%-35.99%. Loan amounts: $1,000-$50,000. Minimum credit score: 560.
Key takeaways
A 401(k) loan may be a better option than a traditional hardship withdrawal, if it's available. In most cases, loans are an option only for active employees. If you opt for a 401(k) loan or withdrawal, take steps to keep your retirement savings on track so you don't set yourself back.
Some common emergency reasons for borrowing money include debt consolidation, medical bills, and vet bills. Jerry Brown is an expert on student and personal loans.
Some loan offers are scams, while others may come from predatory lenders that charge triple-digit interest rates and give you only a few weeks to repay. These loans make it difficult to get out of debt.
If you've experienced a job loss, reduction in hours or unexpected medical emergency, gather paperwork that shows when and how your income changed. A termination letter, doctor's bills or disability paperwork can substantiate your claims and show that your hardship isn't temporary irresponsibility but a genuine crisis.
A hardship is generally an unforeseen, significant financial or personal difficulty preventing someone from meeting basic needs or obligations, such as job loss, major medical bills, funeral expenses, or preventing eviction/foreclosure. The IRS defines it as inability to pay reasonable living expenses (food, housing, healthcare). Specific criteria vary by context (e.g., loans, retirement plans, government aid), but usually involve an immediate, heavy need beyond one's control, often requiring proof like bills or income statements.
Potential IRS Audit Triggers for Hardship Withdrawals
If yours strays from the norm, it may lead to an audit. The IRS may also audit you if it believes you: Reported your income incorrectly. Erroneously reported large donations that are not in line with your income.
There are often two main reasons for financial hardship : 1. You could afford the loan when it was obtained but a change of circumstances has meant you can no longer afford the repayments; or 2. You could not afford to repay the loan when it was obtained.
While there isn't technically a limit on the number of 401(k) hardship withdrawals you're allowed in a year, you are limited by whether you qualify and whether you have enough money in your 401(k) to cover the qualifying hardship amount.