How to Take Funds Out of a 401(k) Due to Heavy Debt

If you suffer severe financial hardships, consider using 401(k) savings to recover.

If you suffer severe financial hardships, consider using 401(k) savings to recover.

When you hold a 401(k) plan through your employer, you accrue retirement savings from earnings prior to taxation. You will not owe taxes on your earnings until you withdraw them from the account. Most 401(k) plans include guidelines for hardship distributions. You should be able to take funds from a 401(k) due to heavy debt if you can prove immediate and significant financial need.

Review the IRS guidelines for 401(k) hardship withdrawals. The guidelines provided by the IRS for financial hardship withdrawals do not automatically apply to all 401(k) plans, so defer to your individual plan for your specific debt situation. IRS allowable reasons for hardship withdrawal include preventing foreclosure from your primary residence, paying funeral or burial expenses, damage repair to a primary residence, college tuition payments for you or a dependent if the tuition is due in the next year, or the payment your own or a dependent’s medical expenses.

Speak with a representative with the company or firm who manages your employer’s 401(k) accounts. Ask about hardship withdrawals and find out your vested balance available for withdrawal. Request the documents necessary to initiate the withdrawal.

Determine how much money you need to take care of your heavy debt. Fill out the documents you receive for the withdrawal, indicating the amount you wish to withdraw. Submit the documents to the 401(k) firm, along with any documents that prove your financial hardship such as a foreclosure notice, medical bills, repair bills or tuition paperwork. The 401(k) plan will specify what documents you must submit.

Report the money you withdrew on your next income tax return and pay taxes on the money as income. Unless your financial hardship meets the IRS penalty-free withdrawal criteria, expect to pay an additional 10 percent tax penalty as well. The IRS may allow a penalty-free withdrawal for some reasons, including if you are completely disabled, if you have medical expense debts over 7.5 percent of your adjusted gross income, if a court order directs you to give the 401(k) funds to a divorced spouse, dependent or child, if you left employ with your employer during or after the year you turned 55, or if you left employ with your employer and a payment schedule for regular withdrawals during the remainder of your life expectancy was already in force. These scheduled payments must continue for at least five years or until you reach age 59 1/2 -- whichever is longer.


  • A hardship withdrawal usually prevents an employee from contributing to the 401(k) for at least six months.
  • You cannot replenish your 401(k) account after you recover from the financial hardship. Taking the withdrawal permanently reduces your retirement savings.

About the Author

Kathryn Hatter is a veteran home-school educator, as well as an accomplished gardener, quilter, crocheter, cook, decorator and digital graphics creator. As a regular contributor to Natural News, many of Hatter's Internet publications focus on natural health and parenting. Hatter has also had publication on home improvement websites such as Redbeacon.

Photo Credits

  • Zedcor Wholly Owned/ Images