While you typically can’t access money from your 401(k) until you reach age 59 ½ or leave service with the employer sponsoring the plan, you may qualify for a 401(k) loan or a hardship withdrawal if you meet certain eligibility requirements.
Before drawing from your retirement savings, however, we strongly encourage you to investigate all other options, as you may permanently impact your retirement readiness.
401(k) loan vs. hardship withdrawal
A 401(k) loan allows you to borrow against your vested 401(k) balance and pay back the balance plus interest to your account over a specified period.
A hardship withdrawal is a one-time disbursement of funds that is used for “immediate and heavy” financial needs and cannot be repaid to your balance or rolled over to another retirement account. The IRS only allows hardship withdrawals for certain circumstances.
See below to learn more about these options:
Guideline 401(k) loan | Hardship withdrawal | |
Eligibility | Actively employed participants who do not have an outstanding 401(k) loan. | Actively employed participants under the age of 59 ½ with a documented financial hardship who exhausted other financial resources. |
Allowable uses | Any financial need. | Qualified reasons include certain medical expenses, principal residence purchase (excluding mortgage), tuition-related costs, payments to prevent eviction of a primary residence, burial or funeral expenses, casualty deduction costs for primary residence, and certain emergency repairs to primary residence. |
Amounts | A minimum of $1,000 to a maximum of 50% of your vested account balance under the plan, not to exceed $50,000 (less any outstanding balance in the prior 12 months) in any 12-month period. | A minimum of $1,000 up to the amount necessary to meet your documented financial need, including taxes, fees, and penalties. |
Repayment | Loans must be repaid in equal installments over a period not extending beyond five years from the date of the loan or up to 10 years if for the purchase of your primary residence. | Hardship withdrawals cannot be repaid or rolled over to another retirement plan or IRA. |
Penalties | The loan amount is not taxed if it is repaid according to the agreed upon terms or sooner.
If you either miss your scheduled payments for 60 days or leave your company and fail to pay back the outstanding balance within 90 days, the outstanding loan will be considered in default and the balance and a 1099-R will be issued. | Withdrawals from your pre-tax account balance are taxed as ordinary income.
Withdrawals are subject to an additional 10% early withdrawal IRS penalty, unless you qualify for a penalty exemption.
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Limitations | Limited to one outstanding loan at a time. | Limited to two hardship withdrawals per plan year. |
Supporting documents | A purchase agreement or mortgage contract is needed for the purchase of a primary residence to request a loan term over five years. Other loans do not need verification. | The hardship withdrawal application allows you to complete a self-certification for your hardship. However, you must keep record of the hardship in the event you are audited by the IRS. |
How to request a loan or hardship withdrawal with Guideline
You can request a 401(k) loan or hardship withdrawal directly from your Guideline dashboard. Access the below articles for step-by-step instructions for each: