What is a Hardship Withdrawal From a 401k? Tax Tips from Carson City’s Kelly Bullis
TAX TIPS (and other stuff)
By Kelly J. Bullis, CPA
2025-November 15th
Title: What is a “Hardship” Withdrawal From a 401k
So, you’ve done a good job of saving for retirement and have a nice balance in your retirement account. Then a problem comes up and you are unable to pay a rather large financial obligation. There sits all that money in your 401k. You could solve your hardship by tapping into that 401k.
Problem is, any withdrawals from a 401k are subject to regular income tax, AND, if you are under 59.5 years old, there is normally an extra 10% early withdrawal fee. Assuming you are in the 15% tax bracket, plus the 10% early withdrawal penalty, whatever you take out will cost you at least 25% in tax! That cost could go up as your tax bracket goes up. Ouch!
Congress made some exceptions to avoid having to pay that 10% penalty. (You can never get out of paying the regular income tax on retirement plan distributions.)
Here are some key exceptions (not every one though). Disability (must be permanent); Disaster Recovery (up to $22,000 if in federally declared disaster zone); Domestic Abuse Victim (lesser of $10,000 or 50% of account balance); Emergency Personal Expense (some limits apply); 1st Time Home Purchase (up to $10,000); Paying an IRS Tax Debt; Medical Expenses (certain rules apply); Paying Health Insurance Premiums while unemployed; Military Reservist called to active duty; Early Retirement (must be 55 or older…government employees only); Terminal Illness;
Basically, the taxpayer “self-certifies” to the IRS when filing their tax return as to the their “Hardship” situation. As mentioned above, some “Hardships” have limits, so they must be applied correctly.
Here is a real life example of a taxpayer (Joe) who didn’t follow the rules and got caught. Not a happy ending!
Joe experienced extreme financial stress from Emergency Personal Expenses incurred during the COVID-19 pandemic. He took $56,000 out of his 401k to cover those expenses. He filed his 2021 tax return, reported his normal taxable income, but did NOT report the $56,000 taken out of his 401k. He also, did not self-certify the “Hardship” reason he should not be subject to the 10% early withdrawal penalty. IRS caught up to him and assessed the regular Federal Income Tax owed on that extra $56,000, as well as the 10% early withdrawal penalty. Joe also got assessed other penalties and interest. Because Joe had failed to self-certify his “Hardship” reason, the IRS refused to drop the 10% penalty, even after he revealed that to the IRS after they caught him in the original underreporting incident.
Moral of the story? Make sure to attach a statement to your return, giving the reason for the IRS not charging the 10% early withdrawal penalty. And also, report all your income the first time.
Have you heard? Psalm 44:26 says, “Rise up to help us. Redeem us for your loving kindness sake.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com Also on Facebook.
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