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It happens to many people: A sudden major expense hits — job loss, medical issue, home repair — and retirement savings are the only option for handling it. Should you find yourself in such a circumstance, you’ll want to learn the rules of 401(k) hardship withdrawals and loans (or those applicable to 403(b) or 457 plans).
Make sure to familiarize yourself with them before taking money out of your account — these transactions are typically irreversible and can create new financial problems if you aren’t careful. Indeed, such withdrawals should be considered as a last resort.
Note that if you’re facing a sudden financial hardship or emergency, you might wonder if you can take out a “401(k) hardship loan.” The answer is no. Your choices are a 401(k) loan or a hardship withdrawal, but there is no such thing as a hardship loan. (And you don’t need to have a hardship to take out a plan loan.)
How 401(k) hardship withdrawals work
If your 401(k) plan allows it, you can take a hardship withdrawal to pay for an “immediate and heavy financial need” that you can’t pay for with other assets, such as a taxable brokerage or savings account. Regular income tax is always due on hardship withdrawals — unless you are able to withdraw Roth 401(k) contributions.
“The hardship provision — though subject to restrictions — can become invaluable,” noted Steve Glenn, a MassMutual financial professional with the Glenn Planning Group in Fleming Island, Florida.
Allowable exceptions, hardship withdrawals and substantiation requirements
There are some types of withdrawals that aren’t considered hardship withdrawals, but also aren’t subject to the 10 percent early withdrawal penalty that normally applies when you take distributions before reaching retirement age. These emergency personal expense withdrawals include:
- Qualified birth or adoption expenses up to $5,000.
- Distributions made on or after the date a doctor certifies that you have a terminal illness or total and permanent disability.
- Withdrawals by domestic abuse survivors of the lesser of $10,000 or 50 percent of the account balance.
- Qualifying medical expenses that exceed 7.5 percent of your adjusted gross income and that won’t be reimbursed by insurance.
- An emergency personal expense up to $1,000, no more than once a year.
- Up to $22,000 in expenses and losses related to a federally declared disaster where you work or live, that won’t be reimbursed by insurance.
- Up to $2,600 per year (for 2026, indexed for inflation) to pay certified long-term care insurance.
The following circumstances may qualify for a hardship withdrawal but are subject to the 10 percent early withdrawal penalty:
- Post-secondary tuition, fees, and room and board for up to the next 12 months for yourself, a spouse, a dependent, or primary beneficiary.
- Burial and funeral expenses for your deceased parent, spouse, children, dependents, or a primary beneficiary.
- Expenses other than mortgage payments for buying your main home.
- Expenses to prevent eviction or foreclosure from your main home.
- Expenses to repair damage to your main home that won’t be reimbursed by insurance.
- Qualified medical expenses that don’t exceed 7.5 percent of your AGI.
While the IRS considers all of the above circumstances as eligible for hardship distributions, your employer does not have to allow all — or any — of them. Also, while these specific distributions avoid the standard 10 percent early-withdrawal penalty before age 59½, the withdrawn amounts are still may be subject to ordinary income tax.
You may want to keep documentation of the circumstances requiring the hardship withdrawal in case of an audit. (Related: Preparing for an IRS audit)
As for proving your hardship to your employer, you must submit a written statement that you don’t have enough other liquid assets to meet your financial need. Your plan sponsor may also require relevant evidence, such as medical bills or a foreclosure notice, because it, too, may be audited.
401(k) hardship withdrawal limits and taxes
You can withdraw only the amount necessary to pay for the hardship, plus the amounts required to pay taxes and penalties on the withdrawal. And the hardship withdrawal is separate from the specific emergency personal expense withdrawal specified in the lists above. Your employer may withhold state and federal taxes by default, but your actual tax bill will depend on your marginal tax rate and may be lower or higher. (See: How to reduce taxable income and avoid a higher tax bracket)
“To avoid a tax bill in April or penalties for underpaying your taxes, you may want to estimate how much tax you will actually owe and instruct your employer to withhold that amount,” Glenn said. “For example, if you’re in the 32 percent federal income tax bracket, you may elect to have 32 percent withheld from the distribution.”
Taxes mean a hardship withdrawal can hurt your 401(k) balance much more than you might initially expect. If your marginal federal rate is 24 percent and your state rate is 6 percent, you would need to withdraw roughly $14,300 to pay for a $10,000 personal emergency expense that didn’t have a 10 percent early withdrawal penalty.
401(k) hardship withdrawal pros
- The 10 percent early withdrawal penalty does not apply to certain emergency withdrawals.
- No waiting period to resume 401(k) contributions after taking the withdrawal, which means you can continue to take advantage of employer matching if available.
- No additional impact if you leave your job after taking the withdrawal. (Related: 3 times when leaving your 401(k) with a former employer may be smart)
401(k) hardship withdrawal cons
- Current-year income tax liability at your marginal rate.
- Lost opportunity for years, if not decades, of tax-free compounding because you can’t repay the money.
- Only a limited number of expenses qualify for a hardship withdrawal.
- Not an option if you can draw on other assets — but that doesn’t include 401(k) loans.
- May take 7 to 10 business days to get the money (potentially slower than charging a credit card, taking out a personal loan, or drawing on an existing home equity line of credit).
- Additional tax reporting when you file your annual return.
“If you have the option to take either a plan loan or a hardship distribution, it can make sense to use a 401(k) loan first, at least up to your allowed limit,” Glenn said. “With a loan, you have a chance to repay the money and avoid taxes. A hardship distribution is taxable and can’t be repaid.”
How 401(k) plan loans work
You need to find out whether your 401(k) plan will let you take out a loan. The IRS allows — but does not require — employers to offer 401(k) loans. Check with your company’s human resources department to find out. They should be able to answer this question and provide you with a copy of the 401(k)’s summary plan description, which should corroborate their answer.
This official document lays out all the details of your plan, including whether the plan allows loans and on what terms. If loans are allowed, they must fall within IRS limits, which are $50,000 or 50 percent of your vested 401(k) balance, whichever is less. However, if 50 percent of your vested balance is less than $10,000, you may be allowed to borrow up to your full account balance. The plan can also specify a minimum loan amount.
The typical plan can give employees up to five years to repay the loan, longer if the loan is to purchase a primary residence. Payments must be substantially equal and made at least quarterly.
401(k) loan examples
Here are two hypothetical examples of how a 401(k) loan might play out.
- Small, short-term loan: Corbin’s vested 401(k) balance is $16,000. Half of that is $8,000. Under IRS rules, the plan may allow him to borrow up to $10,000 (but it doesn’t have to). Corbin only needs to borrow $5,000 and wants to pay it back as quickly as possible, so he asks his employer to withhold $192.31 from each paycheck for the next 26 paychecks (one year) to repay the principal. His actual payments would be higher due to interest.
- Maximum loan amount and term: Shantae’s vested 401(k) balance is $150,000. Half of that is $75,000. Under IRS rules, the most her plan can let her borrow is $50,000, but the plan may have a lower limit. Assuming she’s allowed to borrow the full $50,000, Shantae would need to repay a minimum of $2,500 per quarter for the next 20 quarters to repay the loan in full by the five-year deadline.
Alternatively, she could pay $833.33 per month, or $384.62 every two weeks, to cover the principal. Her actual payments would be higher due to interest.
The interest goes into her 401(k), not to her employer or plan administrator (or a lender, as it would have if she had borrowed money from a bank). The interest rate must be “commercially reasonable,” which employers tend to interpret as the prime rate plus one or two percentage points. For example, in May 2024, when the prime rate was 8.5 percent, a reasonable interest rate on a 401(k) loan might have been 9.5 percent to 10.5 percent.
401(k) loan pros
- Not a taxable distribution (unless you don’t repay it).
- No early withdrawal penalty (unless you don’t repay it).
- Your credit score and history are irrelevant.
- May have a lower interest rate than commercial loans.
401(k) loan cons
- Maximum loan amount may not cover your expenses.
- Miss a 401(k) loan payment and the entire outstanding balance may be considered a taxable distribution.
- Change jobs or get laid off and the entire outstanding balance may become due within 60 days (and become a distribution if you can’t repay it).
- Plan may not allow contributions during repayment period, which would mean missing out on any employer match.
- Opportunity cost of not having the loan money invested.
- Interest payments are made with after-tax dollars that will be taxed again as income when they are withdrawn in the future. (Learn more: Borrowing from your 401(k): The risks)
Weighing your options
Whether you’re in the throes of a financial emergency right now or you’re wondering whether to rely on your 401(k) as a future emergency fund, it’s a good idea to learn up front how 401(k) loans and hardship withdrawals work.
It can be tricky to understand how they might apply to your situation and what the long-term implications of tapping your retirement savings could be, so consider talking with a MassMutual financial professional to evaluate such a scenario and explore alternatives.
Learn more from MassMutual…
4 steps to rebuilding your retirement plan savings
How to read your 401(k) statement — and why it matters
Over 50? How catch-up contributions work
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