Definition
A 401(k) or 403(b) distribution a plan may allow, while you are still employed, for an immediate and heavy financial need such as medical bills, avoiding eviction or foreclosure, funeral costs, tuition, or repairing casualty damage to a home. The amount is capped at what the need requires, the money cannot be repaid to the plan, and the withdrawal is taxed as income, with the 10% early-withdrawal penalty on top if you are under 59½ and no exception applies.
Why it matters
Unlike a 401(k) loan, a hardship withdrawal is a permanent hole: the tax and penalty come out, and the compounding those dollars would have earned is gone for good. Plans are not required to offer them, and documenting the need is on you.
Example
A 40-year-old takes an $8,000 hardship withdrawal to stop an eviction. Income tax at an assumed 20% rate takes $1,600 and the penalty takes another $800, so about $5,600 arrives. The $8,000 left invested at 7% would have grown to roughly $43,000 by age 65, which is the true cost of the withdrawal.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.