A hardship withdrawal lets you take money out of your 401(k) while you are still working, but only if your employer’s plan allows it and you have an immediate and heavy financial need. It is taxed as income, and it usually also faces the 10% early-withdrawal penalty if you are under 59½. The Rule of 55 is different: it removes the 10% penalty for withdrawals from the plan of the employer you left, if you left in or after the year you turned 55. Neither one is a Fidelity rule. Your employer’s plan document sets the details, and Fidelity administers them.
| Hardship withdrawal | Rule of 55 | |
|---|---|---|
| Still employed? | Yes | No, you must have left that employer |
| Needs a qualifying reason? | Yes | No |
| Income tax? | Yes | Yes |
| 10% early-withdrawal penalty? | Usually yes, unless another exception applies | Waived |
| Can you roll it over later? | No | Yes, but a rollover to an IRA ends the exception for that money |
| Who decides? | Your employer’s plan | Federal tax law, but your plan must allow the payout |
What Counts as a Hardship
The IRS lets plans use a safe-harbor list of reasons that automatically count as an immediate and heavy financial need:
- Medical expenses for you, your spouse, dependents, or your primary plan beneficiary.
- Costs to buy your principal residence (not mortgage payments).
- Tuition, fees, and room and board for the next 12 months of post-secondary education for you, your spouse, children, dependents, or primary beneficiary.
- Payments needed to prevent eviction from or foreclosure on your principal residence.
- Funeral expenses for you, your spouse, children, dependents, or primary beneficiary.
- Repairing damage to your principal residence that would qualify for a casualty deduction.
- Expenses and losses from a federally declared disaster, if your home or workplace was in the disaster area.
Your plan may allow fewer reasons than this list, or none. Check the Summary Plan Description.
How Much Can You Take
- Only what you need. The amount cannot exceed the need. Under the IRS rules, the need can include taxes and penalties triggered by the withdrawal itself, if your plan allows it.
- Which money. Your plan decides which sources are available (your own contributions, employer match, earnings). Check your plan.
- No loan first. Since 2020, a plan cannot make you take a loan first or pause your contributions as a condition of a hardship withdrawal, but your plan may still have its own rules.
- Self-certification. The IRS rules let you certify in writing or electronically that you do not have other reasonably available cash or liquid assets to cover the need. A recorded phone statement also counts. Your plan may ask for documents anyway.
What a Hardship Withdrawal Costs: A Worked Example
Say you are 40, in the 22% federal bracket, and take a $10,000 hardship withdrawal to stop an eviction.
| Item | Amount |
|---|---|
| Withdrawal | $10,000 |
| Federal income tax at 22% | about $2,200 |
| 10% early-withdrawal penalty (under 59½, no exception) | $1,000 |
| State income tax | varies |
| Left after federal tax | about $6,800 |
This is an illustration. Your bracket and state matter, and a large withdrawal can push part of it into a higher bracket. A hardship withdrawal also cannot be paid back to your 401(k), so the money stops growing for retirement.
A Hardship Withdrawal Is Not a Loan
A 401(k) loan is paid back with interest to your own account and, if it is repaid on schedule, has no income tax or 10% penalty. A hardship withdrawal is not repaid. If your plan offers a loan and you can afford the payments, compare them before you choose.
How to Request a Hardship Withdrawal at Fidelity
- Confirm your plan allows it. Look in your Summary Plan Description or ask your HR or benefits team.
- Log in to NetBenefits and open your workplace plan. Look for withdrawals or loans. The label varies by plan.
- Choose the hardship reason and enter the amount.
- Provide any documents the plan asks for, such as a bill or an eviction notice.
- Set tax withholding. Hardship withdrawals cannot be rolled over, so the usual 20% rollover withholding does not apply. A default rate (commonly 10% federal) may apply and you can often change it. Withholding is only a prepayment.
- Keep records. The payout is reported on Form 1099-R. Keep proof of the need in case of questions.
If you do not see the option, your plan probably does not offer it. Fidelity cannot override your plan. Only use phone numbers from your own statement or fidelity.com, because search results for 401(k) topics are full of fake “support” numbers.
The Rule of 55
If you separate from service during or after the year you turn 55, distributions from that employer’s 401(k) are not subject to the 10% early-withdrawal penalty. For qualified public safety employees of a state or local government, the age is 50.
- The year you turn 55 counts. If you turn 55 in December and leave in January of that year, you qualify. Leaving at 54 does not, even if you turn 55 the next year.
- Only the plan of the employer you left. Money in a previous employer’s plan or an IRA does not qualify.
- Not for IRAs. Rolling the money into an IRA gives up the exception. If you might need money before 59½, leave some in the old plan or the new employer’s plan.
- Income tax still applies, and cash paid to you has 20% federal withholding unless it is a direct rollover.
- Your plan must allow it. Some plans only pay a lump sum, which would force a large taxable payout. Ask whether partial or installment withdrawals are allowed.
- Leaving voluntarily or involuntarily both work. What matters is the separation date and the age.
Example. Jordan turns 55 in July and is laid off in October of that year. He takes $30,000 from that employer’s 401(k) in December. He owes ordinary income tax on $30,000. Because of the Rule of 55 he avoids the $3,000 10% penalty.
Other Ways to Avoid the 10% Penalty
Hardship withdrawals do not waive the 10% penalty by themselves, but these IRS exceptions may apply to a 401(k) distribution:
- Personal or family emergency expense: one distribution per year, up to the lesser of $1,000 or your vested balance above $1,000.
- Victim of domestic abuse by a spouse or domestic partner: up to the lesser of $10,000 (indexed) or 50% of the account.
- Terminal illness, with physician certification.
- Federally declared disaster: up to $22,000 for qualified individuals.
See Fidelity 401(k) withdrawal rules for more. Always confirm the current dollar limits on the IRS website.
Alternatives to Consider First
- A 401(k) loan, if your plan offers one.
- Hardship programs from the lender, landlord or hospital.
- An emergency fund or a low-interest personal loan.
- A direct rollover or a penalty-free exception that fits your situation.
Talk to a tax professional before taking a large withdrawal.
Frequently Asked Questions
Does Fidelity decide whether I qualify for a hardship withdrawal?
Your employer’s plan decides. Fidelity applies the plan’s rules.
Can I pay a hardship withdrawal back?
No. It is not a loan and cannot be rolled over or repaid.
Do I pay the 10% penalty on a hardship withdrawal?
Usually yes if you are under 59½, unless another exception applies.
Is the Rule of 55 automatic?
The penalty waiver applies if you qualify, but your plan must allow the payout. You may need to report the exception on Form 5329.
Can I use the Rule of 55 on my current employer’s plan?
No. You must have separated from that employer.
What if I roll my 401(k) to a Fidelity IRA?
You lose the Rule of 55 on that money. See the rollover guide.
UseFidelity.com is an independent site and is not affiliated with Fidelity Investments. This is general information, not tax or legal advice.