Fidelity administers most workplace 401(k) plans, but it doesn’t decide whether you can take a hardship withdrawal, an in-service withdrawal, or what counts as a qualifying reason — your employer’s plan does, within limits the IRS sets. Here’s what the IRS requires across virtually every 401(k), what’s left up to your specific plan, and how the taxes and penalties actually work.
Plan-specific rules: Not every 401(k) plan offers hardship or in-service withdrawals, and some plans add their own documentation requirements on top of the IRS minimums below. Confirm your plan’s actual rules on NetBenefits or with your plan administrator before assuming any of this applies to you.
Can You Withdraw From Your 401(k) While Still Employed?
Generally, only under specific circumstances. Most plans restrict “in-service” withdrawals — taking money out while you’re still working for the employer — to hardship situations or certain rollover-source balances, before age 59½. Some plans allow penalty-free in-service withdrawals once you turn 59½, even while you’re still employed, but offering that is a plan decision.
Check the loans & withdrawals section of your account on NetBenefits to see what your specific plan allows.
What Counts as a Hardship Withdrawal?
The IRS recognizes six categories of “immediate and heavy financial need” that qualify a withdrawal as a hardship distribution:
- Medical care expenses for you, your spouse, dependents, or beneficiary.
- Costs directly related to the purchase of your principal residence (this doesn’t include ongoing mortgage payments).
- Tuition, related educational fees, and room and board for the next 12 months of postsecondary education.
- Payments necessary to prevent eviction from, or foreclosure on, your principal residence.
- Funeral expenses for you, your spouse, children, dependents, or beneficiary.
- Certain expenses to repair damage to your principal residence.
A hardship withdrawal has to be limited to the amount you actually need to cover the expense, and you generally have to show you couldn’t reasonably get the money from another source first.
Do You Have to Repay a Hardship Withdrawal?
No. Unlike a 401(k) loan, a hardship withdrawal can’t be repaid or rolled over into another plan or IRA. That’s the central trade-off between the two: a loan preserves your balance if you pay it back, while a hardship withdrawal permanently reduces it.
One thing that did change: as of 2019, plans are no longer required to suspend your contributions for six months after a hardship withdrawal. If your plan follows the current rules, you can keep contributing right away.
Taxes and the 10% Early Withdrawal Penalty
A 401(k) withdrawal is subject to ordinary income tax (Roth contributions you’ve already paid tax on are an exception). If you’re under 59½ when you take it, it’s also typically hit with an additional 10% early-withdrawal penalty — unless one of the IRS’s specific exceptions applies.
Exceptions to the 10% Early Withdrawal Penalty
The IRS allows a 401(k) withdrawal before 59½ to skip the 10% penalty (income tax can still apply) in these situations:
- You separate from service during or after the year you turn 55 (age 50 for public safety employees in governmental plans) — often called the “Rule of 55.”
- The distribution is made after your death.
- You have a total and permanent disability.
- The distribution is made under a Qualified Domestic Relations Order (QDRO), such as in a divorce.
- Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.
- The distribution satisfies an IRS levy on the plan.
- Qualified birth or adoption expenses, up to $5,000 per child.
- A series of substantially equal periodic payments (SEPP).
- Qualified military reservist distributions.
- Qualified disaster recovery distributions, up to $22,000.
- Domestic abuse victim distributions, up to the lesser of $10,000 or 50% of your vested balance (for distributions after 2023).
- Emergency personal expense distributions, up to $1,000 per year (for distributions after 2023, limited to one per year).
Claiming an exception is reported on IRS Form 5329 if your 1099-R doesn’t already reflect it. Several of these — especially the exact distribution codes your plan uses — are worth double-checking with a tax professional.
Hardship Withdrawal vs. 401(k) Loan: Which Should You Use?
If your plan offers both, a 401(k) loan is usually the less costly option when you can repay it: you’re paying interest back into your own account rather than losing the money outright, and it isn’t a taxable event unless you default. A hardship withdrawal makes more sense when you don’t expect to be able to repay a loan, since there’s no repayment obligation at all — at the cost of a permanent reduction to your balance and, in most cases, both income tax and the 10% penalty.
If you’re weighing whether to leave an old 401(k) in place instead of touching it at all, the Rule of 55 is one reason some people choose not to roll over a 401(k) from an employer they’ve left at 55 or older — rolling into an IRA can remove that penalty-free access.
How to Check Your Plan’s Withdrawal Rules on NetBenefits
Because hardship and in-service withdrawal availability is plan-specific, check your actual plan before assuming anything here applies:
- Log in to NetBenefits and open your 401(k) account.
- Look for a Loans & Withdrawals tab, usually under “Quick Links” or “Plan Information.”
- If hardship or in-service withdrawals are offered, you’ll see the qualifying reasons your specific plan accepts and any documentation it requires.
- If you don’t see a withdrawal option, your plan may not offer them outside of standard distributions after you leave the employer.
Alternatives to Consider Before Withdrawing
Because a hardship withdrawal permanently reduces your retirement savings and is rarely the cheapest option, it’s worth ruling out a few alternatives first:
- An emergency savings fund, if you have one set aside.
- A 0% or low-interest balance-transfer credit card, if you can pay it off before the promotional rate ends.
- Withdrawing contributions (not earnings) from an HSA if the expense is medical.
- A 401(k) loan, if your plan offers one and you can realistically repay it.
- A personal loan, which won’t permanently reduce your retirement balance the way a hardship withdrawal does.
Frequently Asked Questions
Does a hardship withdrawal show up on my credit report?
No. A hardship withdrawal isn’t a loan, so it was never reported to the credit bureaus and has no effect on your credit score — that’s true whether you take one or not.
Can I still contribute to my 401(k) after taking a hardship withdrawal?
Yes, as of 2019. Plans used to be required to suspend your contributions for six months after a hardship withdrawal; that requirement was repealed, so under current rules you can keep contributing right away if your plan follows them.
What is the “Rule of 55”?
It’s the exception that lets you take penalty-free 401(k) withdrawals if you separate from your employer during or after the year you turn 55 (50 for public safety employees). You still owe ordinary income tax; it’s the 10% early-withdrawal penalty that’s waived, and only from that specific employer’s plan.
Do I owe state tax on a 401(k) withdrawal too?
Often, yes, but it depends entirely on your state’s own tax rules — some states don’t tax retirement distributions, others do at your regular income tax rate. Check with a tax professional or your state’s tax agency for your specific situation.
Can I repay or undo a hardship withdrawal?
No. A hardship withdrawal can’t be repaid to the plan or rolled into an IRA or another plan — that’s the key difference from a 401(k) loan, which you do repay.
Educational information, not financial or tax advice. Hardship and in-service withdrawal availability, qualifying reasons, and documentation requirements are set by your employer’s plan, not by Fidelity. Confirm your plan’s specific rules on NetBenefits or with your plan administrator, and talk to a tax professional before withdrawing from your retirement savings.
Sources
- IRS, Retirement Topics – Hardship Distributions
- IRS, Retirement Topics – Tax on Early Distributions
- Fidelity, Should you take money out of a 401(k)?