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PHNjcmlwdCB0eXBlPSJ0ZXh0L2phdmFzY3JpcHQiIHNyYz1odHRwczovL3N0YXRpYy5teWZpbmFuY2UuY29tL3dpZGdldC9teUZpbmFuY2Vfdmlld3BvcnRfZGV0ZWN0aW9uLmpzPjwvc2NyaXB0PjxzY3JpcHQgYXN5bmMgdHlwZT0idGV4dC9qYXZhc2NyaXB0Ij5teWZpV2F0Y2hXaWRnZXQoJ215ZmlXaWRnZXRfOScpO215ZmlXYXRjaFdpZGdldCgnbXlmaVdpZGdldF85LjEnKTtteWZpV2F0Y2hXaWRnZXQoJ215ZmlXaWRnZXRfMCcpOzwvc2NyaXB0Pg==Ann C. Logue is fascinated by the intersections of money, culture, and everyday life. She has written about finance at every level, from how to save money at the grocery store to complicated hedge fund strategies. She is the author of five books, Options Trading (Alpha 2016; 2e Penguin 2023), Emerging Markets for Dummies (Wiley 2010), Socially Responsible Investing for Dummies (Wiley 2009), Day Trading for Dummies (Wiley 2007; 4e 2018), and Hedge Funds for Dummies (Wiley 2006; 2e 2023). She has also provided ghostwriting and technical editing services for books published by Bloomberg Press, ClydeBank Media, the International Monetary Fund, and Pearson Educational Services. In addition to her books, Logue has written about industries, executives, and current events for a wide range of consumer and trade publications, including the New York Times, Barron's, Newsweek, Motley Fool, and Entrepreneur. She has also taught finance at the University of Illinois at Chicago, Southwest Jiaotong University in Chengdu, Sichuan, China, and as the Fulbright-Garcia Robles US Studies Chair at the Universidad de Guadalajara, Jalisco, Mexico. Her current career follows 12 years of experience in the financial markets as an analyst with Volpe Brown Whelan & Co., The Chicago Corporation, and Kemper Mutual Funds. She is a CFA charterholder. She holds a bachelor's degree in economics from Northwestern University and an MBA from the University of Chicago.Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.Mobile app users, click here for the best viewing experience.Life throws a lot of curveballs. When an unexpected job loss, medical emergency, or other life event leaves you short of funds, you may be tempted to take a hardship withdrawal from your 401(k). After all, life is uncertain, and you have the money and a current need, right? A traditional 401(k) plan allows for tax-deferred retirement savings, with the idea that the money will remain untouched until you’re ready to leave work behind. IRS regulations allow account holders to take money early under certain circumstances, but there’s a catch: a 10% early withdrawal penalty on top of other taxes that may be due on the amount withdrawn. Several 401(k) administration firms, including Vanguard and Fidelity, have reported that the number of people taking hardship withdrawals from their retirement accounts has increased over the past few years. Recent reporting by the New York Times found that hardship withdrawals increased by as much as 33% at some administration firms. While a 401(k) withdrawal is one way to ease financial pressure, it may not be the best. Here’s what you need to know about 401(k) hardship withdrawals, plus alternatives that you may want to consider.What is a 401(k) hardship withdrawal?A 401(k) hardship withdrawal is money taken from your retirement plan before you retire to cover the costs of an emergency. The funds you receive are not only taxed as ordinary income, but they may also be subject to an additional 401(k) early withdrawal penalty of 10% if you're under age 59. This makes the total cost of using the funds early larger than getting money from other sources. There are a few instances in which the IRS allows penalty-free pre-retirement withdrawals, including:Medical care expenses for the employee or familyDown payment on the purchase of an employee’s principal residence Tuition, related educational fees, and room and board expenses for the employee or familyPayments necessary to prevent the eviction or foreclosure on the employee’s principal residenceFuneral expenses for the employee or family membersCertain expenses to repair damage to the employee’s principal residence Withdrawals for any other purpose are subject to the 10% penalty tax. No matter the reason for the withdrawal, the amount you can take out is limited to what you and your employer have contributed. You cannot take out your investment earnings. For example, if you contributed $2,000, your employer contributed another $2,000, and you had a 15% investment return, your account balance would be $4,600. You can take a hardship withdrawal of up to the $4,000 contributed, but the $600 in investment earnings must stay in the account. The process begins by filing an application for withdrawal with your employer’s human resources department, including the reason for the withdrawal and estimates of the expenses involved. How about a 401(k) loan?Depending on the terms of your plan, you may be able to take a loan instead of a hardship withdrawal from your 401(k). Employers don’t have to allow loans from their retirement offerings, but many do. The IRS has regulations in place for these plans. If you have access to a 401(k) loan, you may borrow the lesser of $50,000 or half of your vested balance. You will need approval from your spouse unless the loan is $5,000 or less. Generally, you have five years to repay the loan through quarterly payments, with exceptions for people serving in the military or putting funds toward the purchase of a primary residence. The money borrowed comes due in full when you leave your job. If you can’t pay it back, the money is treated as a withdrawal, and you will be subject to the 10% penalty tax.Deciding whether to take a 401(k) hardship withdrawalAlthough 401(k) plans were built for retirement, they can be a ready source of funds for other uses. Do you have another option with a lower cost? Not only will you have to pay taxes, including the additional 10% penalty, but you will also set back your retirement savings. Generally, you only want to tap into your retirement early if you have no other options and your purpose qualifies as a penalty-free hardship withdrawal. And even then, you’ll only want to withdraw what you need for the crisis at hand so that you don’t undermine your retirement more than you have to.What to do instead of taking a 401k hardship withdrawalBefore you take a hardship withdrawal from your 401(k), see if you can tap other resources first.Try to set up a payment plan with your creditor: Some emergencies can be solved with a little time. Some health care providers, auto repair shops, and appliance stores will allow you to pay in installments, potentially even interest-free, so you can pay off your debt in manageable chunks.Check into government benefits: Depending on the nature of your emergency, you may be able to access government funds for support after a natural disaster, solving a short-term food shortage, or taking care of a medical expense. If you have the time, a little research may help you solve your problem without tapping your retirement funds.Consider using a credit card: Credit card interest rates can be high, but if your need is truly short term, and if you qualify for a card with a 0% intro APR (look for one with an intro period of at least 14 months), then your card may offer a simple way to help you cover your expenses at a (relatively) low cost.Take out a HELOC: A home equity line of credit, or HELOC, can help you use the equity in your house to cover an unexpected expense. Be sure you have a plan to pay it off, because you don’t want to end up losing your house.Tap a Roth IRA first: If you have a Roth IRA or Roth 401(k) (and some employers offer them), you can take out your contributed funds at any time without paying a penalty. This makes them a better source for emergency funds than a traditional 401(k)Once you get past your current crisis, consider building up an emergency fund. Interest rates on high-yield savings accounts are more attractive than they have been in a long time. These funds can make the next emergency a little less painful. While it can be tough to set aside savings every month, even a small amount will add up over time. Looking for a credit card with a low APR? Start here.Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].