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We look forward to continuing to help individuals and families achieve their ideal retirements.

Pinnacle Retirement Group
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By Ian Berger, JD
IRA Analyst

Participating in a company plan, like a 401(k) or 403(b) plan, is a great way to save for retirement. But to make sure that employees don’t use those plans as checking accounts, Congress has imposed limits on when you can withdraw your funds. Generally, you can’t receive a distribution until severance from employment, disability or death. Most plans also allow payouts after age 59 ½ – even if you’re still working – and allow you to borrow against part of your account while still employed.

Beyond that, your plan may (but isn’t required to) let you pull out your funds to take care of a financial hardship. Here’s a quick summary of how hardship withdrawals work:

Tax consequences. Hardship withdrawals aren’t free. Unless your withdrawal comes from Roth contributions, you’ll be hit with income taxes. And, if you’re under age 59 ½, you’ll also likely be hit with an early distribution penalty equal to 10% of your withdrawal. You can’t roll over your hardship withdrawal to an IRA or back into the plan.

Hardship reasons. A 401(k) or 403(b) withdrawal is available only for an “immediate and heavy financial need.” (The rules are stricter for withdrawals from 457(b) plans for government workers.) Most plans use the following list of “safe harbor” events that automatically qualify:

  • Medical expenses for you, or your spouse, dependents or plan beneficiary.
  • Costs related to purchasing your primary residence (but not mortgage payments).
  • Tuition, fees and room and board expenses for the next 12 months of postsecondary education for you, or your spouse, children, dependents or plan beneficiary.
  • Payments necessary to prevent eviction from your principal residence or to prevent foreclosure on a mortgage on a principal residence.
  • Funeral expenses for you, or your spouse, children, dependents or plan beneficiary.
  • Certain expenses to repair damage to your principal residence.

Limits on withdrawals. Besides showing that your withdrawal is for one of the above-listed expenses, you also must certify you’re requesting no more than the amount needed to pay for the expense. In addition, you’ll need to verify that there are no “regular” distribution options available to you, such as an in-service payout after age 59 ½. Finally, you must represent to the plan that you don’t have enough cash or other liquid assets to cover the expense.

Several of the hardship withdrawal rules were loosened in the Bipartisan Budget Act of 2018:

Suspension of deferrals. Before the 2018 act, you couldn’t get a hardship withdrawal unless the plan suspended you from making elective deferrals for at least 6 months. The 2018 act eliminated the suspension rule.

Plan loans. Previously, you needed to take a plan loan (if available) before withdrawing funds for a hardship. That requirement has now been relaxed.

Funds available for withdrawal. The 2018 act expanded the sources of funds available for a hardship withdrawal. Now, 401(k) plans can make earnings on elective deferrals available for withdrawal. In addition, withdrawals can come from several other employer contribution sources. (These changes do not apply to most 403(b) plans.)


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