401(k) and IRA Hardship Withdrawal Limits: the Costs of Early Distributions

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Retirement Accounts and Early Withdrawals

The idea behind a retirement account is simple: you put money in, and you don’t touch it until it’s time to retire. In exchange for making the effort to not end up on welfare in your old age, Uncle Sam gives you a break on your taxes. But what happens if you have an urgent need for money and your retirement account is the only place to get it?

As it happens, there are allowances for this sort of situation, and you can take money out of your retirement accounts…but at a cost. Read on for more information on 401(k) and IRA hardship withdrawal limits and penalties.

IRA Withdrawals

In general, there are no rules about when you can withdraw your money from an IRA; it’s yours, and you can take it at any time you want. However, you end up losing the benefits of the plan: not only is the money you withdraw taxed, but you have to pay an additional 10% tax if you’re younger than 59 1/2. (If the IRA is a SIMPLE IRA and the withdrawal happens within the first two years of participation, then you pay an additional 25% tax rather than 10%). Once you reach retirement age, you can withdraw money at any time; you are required to begin taking withdrawals by age 70 1/2.

While qualified retirement plans, such as a 401(k), often have language providing for hardship withdrawals, the fact that an IRA allows distributions at any time means that there is no hardship provision allowing you to remove money. However, certain types of distributions are exempt from the additional tax mentioned above. These exceptions are for qualified educational expenses or for buying your first home.

In the case of a Roth IRA, all contributions (but not earnings) can be withdrawn at any time without penalty, regardless of your circumstances.

401(k) Withdrawals

While there is no need for special language on IRA hardship withdrawal limits, due to the ability to take your money out at any time, 401(k) plans are a different story. 401(k) plans, and similar qualified plans such as the 403(b) and 457(b), are more restrictive than IRAs; they are easier to fund (because they’re funded with after-tax dollars) but you generally cannot touch any of the money until retirement. However, such a plan is permitted (but not required) to provide for hardship distributions. The rest of this article will assume a 401(k), but the rules for the other qualified plans are similar.

A hardship distribution must be made due to an immediate and heavy financial need, and must be sufficient to satisfy the need. (The need can be of the account owner directly or of the owner’s spouse or children). A need does not have to be unforeseen to be immediate and heavy. Examples of legitimate expenses include medical expenses, buying a (primary) home, educational posts, avoiding eviction from your primary home, funeral and burial expenses, and repairing damage to your primary home. Such a distribution may only be made if no other resources are available to meet the need.

There is no fixed dollar limit of how much you can withdraw from your plan; however, it cannot be more than is required to meet the hardship need or more than the total amount of contributions (not earnings or matching contributions from your employer) made to the plan.


For detailed information on retirement plans, refer to the appropriate section of the tax code - 401 for the 401(k), 402 for an IRA, and 457 for the 457(b).