IRA & 401k Hardship Withdrawals: Eligible Reasons and Tax Implications

A question we get often is: When can I withdraw from my IRA or 401k without penalties?

Retirement accounts like a traditional and Roth IRA, and a 401k, generally have an early distribution penalty tax of 10% when you take a withdrawal before the eligible withdrawal age of 59½. Roth IRAs have an additional 5-year rule that requires you to have owned your Roth IRA for at least 5 years, in addition to being at least 59½ years of age. 

However, there are certain instances where the early distribution penalty is not applied when you’re withdrawing for reasons of hardship. Let’s take a look at them below.

What is a hardship withdrawal?

A hardship withdrawal is an IRS provision that allows you to withdraw funds from certain types of retirement savings accounts, such as a 401k or an IRA, before reaching the eligible retirement age, typically without incurring early withdrawal penalties. The purpose of a hardship withdrawal is to provide financial assistance when you’re facing significant financial hardships or unexpected financial emergencies.

Hardship withdrawals are subject to specific criteria and conditions set by the retirement plan or the financial institution that manages the account. The criteria for qualifying hardships can vary depending on the plan, but they often include expenses related to medical emergencies, purchasing a primary residence, paying for funeral expenses, or covering educational costs.

Different retirement plans and financial institutions may have their own rules and requirements regarding hardship withdrawals, so it’s advisable to consult the specific plan or financial advisor for detailed information.

Overview

While some of the hardship withdrawal exceptions are the same for IRAs and 401ks, there are some minor differences. Before we dive into the specific hardship withdrawal exceptions, let’s go through an overview of what’s allowed for an IRA versus 401k.

Exception	IRA	401k
Death	Yes	Yes
Disability	Yes	Yes
Medical expenses	Yes	Yes
Health insurance premiums	Yes	No
First time home purchase	Yes	No
IRS levy	Yes	Yes
Birth or adoption expense	Yes	Yes
Substantially equal periodic payments (SEPP)	Yes	Yes
Military	Yes	Yes
Burial and funeral expenses	No	Yes

Eligible reasons for IRA hardship withdrawals

The IRS lists the following reasons as qualified hardship withdrawals for IRA owners:

Let’s go through each exception in more detail below.

Death or disability

If you pass away, your IRA can be withdrawn by your beneficiaries without the 10% early distribution penalty tax. Withdrawals are also free from penalties if you become totally and permanently disabled. There are no limitations on how hardship withdrawals taken due to death or disability can be used, but if disabled, you must be able to provide proof of disability to the IRS.

Medical expenses

You can take a distribution from your IRA without penalties to cover unreimbursed medical expenses for yourself or a dependent. The medical expenses must not exceed 10% of your adjusted gross income (AGI), which represents your taxable income minus certain deductions.

A large variety of medical treatments are considered eligible expenses for a hardship withdrawal including most medical checkups and procedures, visits to the dentist and optometrist, and prescriptions and surgeries.

If you choose to take a hardship withdrawal from your IRA for medical expenses, you must take the withdrawal in the same year you incur the medical bills. You must include your medical expenses in your tax return through Form 5329, but you’re not required to itemize deductions.

Health insurance premiums

You can withdraw without penalties in order to pay for health insurance premiums for yourself, spouse, and dependents. In order to qualify, you must have been unemployed and have received unemployment compensation for at least 12 consecutive weeks.

Higher education expenses

Your IRA funds can be withdrawn without penalties for higher education expenses for yourself, spouse, children, grandchildren, or immediate family members.

You can use the funds for tuition, books and school supplies, room and board, and any equipment you might need such as bags, laptops, tablets, etc. In order to qualify, the individual benefiting from the distributing must be enrolled at least on a part-time basis, and must use the withdrawn funds in the same year you make the withdrawal.

Note: An IRA withdrawal gets added to your taxable income, which could affect your student loan eligibility.

First time home purchase

​​For buying your first home, you can take out a maximum of $10,000 from your IRA. The IRS lets you take advantage of this exception even if it’s technically not your first home. As long as you haven’t owned a principle residence in the past two years, you’re allowed to withdraw for a home purchase. However, you must use the money within 120 days of taking your distribution. You can take out multiple withdrawals for home purchases, but the maximum you can withdraw for this during your lifetime is $10,000.

Note: If you’re married, your spouse can also qualify for the same hardship withdrawal and withdraw up to $10,000 penalty-free from their IRA.

IRS levy

If you owe the IRS and they take your retirement funds in order to satisfy a tax debt, you won’t incur any early withdrawal penalties.

Birth or adoption

The IRS lets you withdraw up to $5,000 from your IRA if you’re giving birth or adopting a child. This is a one-time exception (not on a per child birth/adoption basis) and you must withdraw the funds within one year after the birth or adoption.

Substantially equal periodic payments (SEPP)

Even if you’re under the age of 59½, you can qualify for penalty-free withdrawals by taking at least five substantially equal periodic payments, also referred to as SEPP, for five consecutive years, or until you turn 59½ (whichever takes longer). The amount you can withdraw is based on your life expectancy set by the IRS.

Military

If you’ve been ordered or called to active duty after September 11, 2001, for an indefinite period, or for longer than 180 days, you can withdraw from your IRA penalty-free. The withdrawal must be made during your time of service in order to be eligible.

Eligible reasons for 401k hardship withdrawals

401k hardship withdrawals have fewer exceptions than an IRA hardship withdrawal. For example, you can take a hardship withdrawal for higher education costs, health insurance premiums (if unemployed), and for first-time home purchases for an IRA. These are not eligible reasons for 401k hardship withdrawals.

There is mixed information on this, as we’ve seen many resources online that state that 401k hardship withdrawals can be used for home purchases and education expenses. This is not true. The IRS strictly states that these expenses are not eligible to be funded through 401k hardship withdrawals.

Here are all of the eligible reasons for a 401k hardship withdrawal.

Most of the eligible reasons for a 401k hardship withdrawal follow the same rules as those of an IRA hardship withdrawal. Since we already went through most of the exceptions in detail, let’s only focus on what’s different in a 401k hardship withdrawal.

Burial and funeral expenses for a spouse or dependent

You can withdraw from your 401k without penalties if you need the money to pay for burial or funeral expenses for a spouse or dependent. This exception is not available with an IRA hardship withdrawal.

Birth or adoption expense

The $5,000 that you’re allowed to withdraw penalty-free can come from either your IRA or 401k, but you cannot exceed the $5,000 withdrawal limit.

Substantially equal periodic payments (SEPP)

You can only take substantially equal period payments (SEPP) from your 401k if you’re no longer employed with the company you work for. You are not allowed to take SEPP when you are still working at the company that sponsors your plan.

Taxes on hardship withdrawals

While hardship withdrawals can offer exceptions to early distribution penalties, taxes will remain unaffected. If you owe taxes on a distribution, you’ll have to pay them even if you qualify for a hardship withdrawal.

Hardship withdrawals from a traditional IRA

Hardship withdrawals from a traditional IRA are taxed as ordinary income if you’re under the age of 59½. The amount you withdraw gets added to your taxable income for the tax year.

Learn more: Traditional IRA Withdrawal Rules

Hardship withdrawals from a Roth IRA

Hardship withdrawals from a Roth IRA are tax-free as long as you’re over the age of 59½ and your Roth IRA is at least 5 years old (at least 5 years must have passed since your first contribution).

Learn more: Roth IRA Withdrawal Rules

Hardship withdrawals from a 401k

Hardship withdrawals from a 401k are taxed as ordinary income if withdrawing from a pre-tax 401k account and tax-free if withdrawing from a Roth 401k account.

Learn more: 401k Withdrawal Rules

Is there a limit to how much I can withdraw?

Yes, there is a limit on how much you can withdraw for each exception.

Consequences of taking a hardship withdrawal

If you’re considering taking a hardship withdrawal, keep in mind the consequences of taking an early distribution from your plan: