401(k) hardship withdrawals: What plan participants need to know

A plain-language guide to hardship withdrawal eligibility, costs, and the request process for 401(k) plan participants weighing an early withdrawal.Retirement savings are meant to stay untouched for decades, but according to Vanguard's How America Saves report, 401(k) hardship withdrawals hit a record high in 2025, with 6% of plan participants in the report requesting one, up from 4.8% the year before. If you're facing a medical bill, an eviction notice, or another financial emergency, your 401(k) can feel like the only place left to turn.

Before you request a hardship withdrawal, it helps to know exactly what qualifies, what it costs, and how it compares to other options. This guide walks through the IRS rules step by step, using plain language, so you can make an informed decision about your own plan.

What is a 401(k) hardship withdrawal?

A 401(k) hardship withdrawal is a distribution a 401(k) plan permits, before age 59½ and without the usual restrictions, when a plan participant has an "immediate and heavy financial need." You can learn more about what qualifies as an emergency here: IRS Retirement Topics: Hardship Distributions.

This is money you’ve already contributed, not a new benefit, and once it's withdrawn, it's gone from the account for good. Plans aren't required to offer hardship withdrawals at all, and many that offer them only allow you to withdraw for specific reasons, so the first step is always checking your own plan document.

A hardship withdrawal is easy to confuse with a 401(k) loan, but the two work very differently:

What qualifies as a hardship? (IRS safe harbor reasons)

Most plans use the IRS's "safe harbor" list to decide what counts as a hardship. If your need fits one of these seven categories, it's treated as an immediate and heavy financial need, per IRS.gov's hardship distribution FAQs:

1. Medical care expenses: Unreimbursed costs for you, your spouse, dependents, or a plan beneficiary.
2. Purchase of a primary home: Costs directly tied to buying your principal residence (this excludes ongoing mortgage payments).
3. Tuition and education costs: Tuition, fees, and room and board for the next 12 months of postsecondary education for you, your spouse, children, or dependents.
4. Eviction or foreclosure prevention: Payments necessary to prevent eviction from, or foreclosure on, your principal residence.
5. Funeral or burial expenses: Costs for the funeral of a parent, spouse, child, dependent, or beneficiary.
6. Home repair costs: Certain expenses to repair casualty damage to your principal residence.
7. Disaster-related expenses: Losses connected to a federally declared disaster in an area where you live or work.

Employers aren't required to offer every category on this list, and some plans allow additional reasons beyond it. Log in to your Betterment at Work account or check your summary plan description to see exactly which hardship reasons your plan permits.

How much can you withdraw?

You can withdraw only the amount necessary to satisfy your financial need, and no more. Under current IRS rules, that amount may also include a reasonable estimate of the taxes and penalties the withdrawal itself will trigger.

Whether you need to exhaust other resources first, such as savings or a plan loan, depends on your plan. The IRS no longer requires participants to take all available plan loans before requesting a hardship withdrawal, but some employers still build that requirement into their plan document.

What does a hardship withdrawal cost you? (Taxes and penalties)

A hardship withdrawal is taxed as ordinary income in the year you take it. If you're under 59½, it typically also carries an additional 10% early withdrawal penalty on top of that income tax.

Exceptions to the 10% penalty include (per IRS Retirement Topics: Exceptions to Tax on Early Distributions):

• Unreimbursed medical expenses above 7.5% of your adjusted gross income
• Total and permanent disability
• Death of the participant
• An IRS levy on the plan
• Certain birth or adoption expenses, up to $5,000
• A federally declared disaster
• Domestic abuse, up to $10,000 (SECURE 2.0)

Some items listed above may be separate distribution provisions rather than standard hardship distributions

Beyond the immediate tax bill, the bigger cost is often lost growth. As a hypothetical example, $10,000 left invested for 30 years at an assumed 7% average annual return would grow to roughly $76,000. So a $10,000 withdrawal at age 35 could mean giving up that growth by age 65. This example is for illustrative purposes only, is not a projection or guarantee of future results, and does not reflect fees or taxes.

Do you have to pay back a hardship withdrawal?

No. Unlike a 401(k) loan, a hardship withdrawal is never repaid and can't be rolled into another retirement account.

Since final regulations took effect in 2019, plans are also no longer required to suspend your contributions after a hardship withdrawal, so in most cases you can keep contributing to your 401(k) right away.

How to request a hardship withdrawal

1. Check your plan's eligibility rules. Confirm your plan offers hardship withdrawals and that your reason falls within its permitted categories.
2. Gather documentation. Common examples include medical bills, an eviction or foreclosure notice, a funeral invoice, or a home purchase contract.
3. Submit your request. Betterment at Work participants can start a hardship withdrawal request directly from their account dashboard.
4. Wait for processing. Most requests are reviewed and processed within a few business days once documentation is complete, though timelines vary by plan.

You can check your specific plan's hardship rules, permitted categories, and documentation requirements anytime through your Betterment at Work participant portal.

Alternatives to consider before withdrawing

A hardship withdrawal is permanent, so it's worth comparing it against other options first. None of these will fit every situation, but each is worth a look:

• 401(k) loan: Lets you borrow from your own balance and repay it with interest, typically without triggering taxes or penalties if repaid on schedule.
• Emergency savings or an HSA: If you have a dedicated emergency fund or a health savings account, these dollars are often more accessible and don't reduce your retirement balance.
• Other low-cost borrowing: A personal loan, a 0% medical payment plan, or a hardship program from your creditor may cost less over time than the taxes, penalty, and lost growth of a withdrawal.

The right choice depends on your specific need, timeline, and financial picture, so it's worth weighing the full cost of each option before deciding.

Why Betterment at Work

Financial stress doesn't stay contained to one part of an employee's life, and a confusing withdrawal process only adds to it. Betterment at Work gives plan participants a clear view of their plan's hardship rules, a straightforward way to request a distribution, and access to financial coaching for the bigger picture around a difficult financial moment.

Ready to offer your workforce an award-winning retirement plan? Check out Betterment at Work today.