Will I Be Penalized for a Hardship 401K Withdrawal?

Paul McEwan | October 17th, 2011

A reader asked: I wanted to do a hardship with my 401k and was wondering if would be penalized 10 percent of the balance? I borrowed from my 401k and haven’t paid all of it back yet. Will I be able to do a hardship with remaining balance left?

Hardship withdrawals and loan provisions are optional features of a 401k plan, and are not mutually exclusive. Review your plan’s Summary Plan Description to determine whether hardship withdrawals are available in your plan.

If so, you could take a hardship distribution, assuming you meet the hardship requirements listed in your Summary Plan Description — even with an outstanding loan.

Assuming you are under age 59 ½, a hardship distribution is subject to a 10 percent excise tax penalty as well as your marginal federal and state income tax rates.

Hardship withdrawals are typically restricted to plan contributions from your paycheck. The best advice is to exhaust all other sources of money (including loans from banks or family and friends) before you tap your 401k account balance for a hardship distribution.

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