December 01, 2017 | Posted in:

What are the Rules for Hardship Withdrawals?

Alloy Silverstein’s Tax Tip of the Week

Emergencies happen that may require you to need to borrow money in a hurry. Instead of turning to a bank for a loan with sky-high interest, there is another alternative you could consider: withdrawing from your IRA or 401(k) retirement plan.

The key is that these accounts are meant to provide income for retirement, so they should not be “raided” without good reason. As a last resort, however, a 401(k) or IRA could provide the funds you desperately need.

“Not all company retirement plans are created equal,” warns Associate Partner Ren Cicalese III, CPA, MST. “Some plans do not allow for hardship distributions. If you’re considering this option, it’s important you speak with someone in the company’s HR department to determine if it’s a possibility.”

If your plan does permit hardship withdrawals, there are different rules for an IRA compared to a 401(k) plan. With an IRA, you can take out the money without restraint, because it’s yours to do as you wish. But you can only withdraw funds from a 401(k) with your employer’s approval (if it’s even permitted).


Eligible Hardship Withdrawals

The list of reasons you can make a hardship withdrawal includes:

  • Unreimbursed medical expenses for you, your spouse or dependents
  • Acquisition of a principal residence and certain expenses for repairing damage to your principal residence
  • Payment of college tuition and related educational costs (e.g., room and board) for the next 12 months for you, your spouse, dependents or children who are no longer dependents
  • Payment to prevent eviction from your home or foreclosure on the mortgage of your principal residence
  • Funeral expenses
  • Certain disaster declarations announced by the IRS (such as Hurricane Harvey and Irma victims in 2017)

Tax Impact of a Distribution

Of course you have to keep in mind the possible tax implications. In any event, a distribution from a 401(k) or IRA is subject to federal income tax at ordinary income rates. In addition, a 10 percent tax penalty generally applies to most payouts prior to age 59½.

“When a distribution is made from a 401(k) or IRA, a tax form will be issued to report the distribution. It’s important that you retain this form and provide it to your CPA to use in preparing your tax returns. Depending on the state you live in, contributions to a retirement plan may not be a deductible item. If you don’t get the deduction, it reduces the taxable income upon distribution.” – Ren III

“However, if the funds that have been withdrawn are only needed for a short duration, and can be returned to the IRA within 60 days, the withdrawal will be excluded from income. This can only be done every 365 days.” –  Mike Engleman, CPA


There are several exceptions to the 10 percent penalty that may or may not align with the reasons for hardship withdrawals. For instance, you might be able to avoid the penalty on early distributions from a 401(k) to pay emergency medical expenses, but not to pay your child’s college tuition for the upcoming school year.


A hardship withdrawal is typically never someone’s first choice, but sometimes it’s the last option. Consider all your other options before moving ahead with a hardship withdrawal. Call us today if you’d like talk about your options.

© MC 2017 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.


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