What are the Rules Regarding Withdrawals from my 401(k)?

With economic conditions worsening, many cash-strapped people are seeking details on 401k withdrawal rules to help meet their financial commitments. Generally, distributions of elective 401k deferrals (ie. “contributions”) cannot be made until one of the following occurs: 1) you die, become disabled, or otherwise have a severance from employment, 2) the plan terminates and no successor defined contribution plan is established or maintained by the employer, or 3) you reach age 59½ or incur a financial hardship.

Most people hoping to withdraw funds from their 401k are looking for guidance on the financial hardship 401k withdrawal rules.

Hardship withdrawals are allowed by law but plan sponsors are not required to provide this option. Many 401(k) plans, however, do allow employees to make a hardship withdrawal because of immediate and heavy financial needs (as defined by the IRS). Generally, hardship distributions from a 401(k) plan are limited to the amount of the employees’ elective deferrals only, and do not include any income earned on the deferred amounts. If the plan permits, certain employer matching contributions and employer discretionary contributions may also be included in hardship distributions. Hardship distributions are not treated as eligible rollover distributions.

Your 401k summary plan description (SPD) will state whether or not your employer allows withdrawals in your plan. If withdrawals are allowed, your employer will provide the forms and explain the process you will need to follow to demonstrate financial need for the withdrawal.

The IRS code that governs 401(k) plans provides for hardship withdrawals only if:

  1. the withdrawal is due to an immediate and heavy financial need;
  2. the withdrawal is necessary to satisfy that need (i.e. you have no other funds or way to meet the need);
  3. the withdrawal amount does not exceed the amount needed by you;
  4. you have first obtained all distribution or nontaxable loans available under the 401k plan; and
  5. you cannot contribute to the 401k plan for 6 months following the withdrawal.




According to the IRS, a 401k distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for:

  • Expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care;
  • Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
  • Payment of tuition, related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee, or the employee’s spouse, children, or dependents;
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence;
  • Funeral expenses; or
  • Certain expenses relating to the repair of damage to the employee’s principal residence.

Hardship withdrawals are subject to income tax, and if you are not at least 59½ years of age, the 10% 401k withdrawal penalties as well. For example, If you take a $10,000 hardship withdrawal, you will owe $2,800 in federal income taxes (28% tax bracket) and an additional $1,000 to cover the early withdrawal penalty. You’ll be left with $6,300, or even less if you also owe state and local income tax.