Retirement Plan Hardship Withdrawal for Medical Bills: What You Need to Know

The IRS defines qualified medical expenses as expenses that would be deductible on your tax return, such as doctor visits, hospital stays, and prescriptions. These expenses must be incurred by you, your spouse, or your dependents.

A retirement plan hardship withdrawal is an early withdrawal from your retirement savings initiated under specific circumstances that demonstrate a heavy financial need.

The IRS has set rules that must be met in order to qualify for a hardship withdrawal, which can allow you to access retirement funds penalty-free.

A hardship withdrawal can allow you to access retirement funds penalty-free if you satisfy certain rules, allowing you to meet immediate and hefty financial needs. Unlike plan loans, money received from a hardship withdrawal does not need to be repaid.

You'll still have to pay income tax on the total amount of the withdrawal, even if you qualify for an exception to the 10% early withdrawal penalty.

A 401(k) hardship withdrawal is an early withdrawal from your 401(k) retirement plan initiated under designated circumstances that demonstrate a heavy financial need.

It's not a free pass to dip into your retirement savings, but rather a specific rule that allows you to access funds penalty-free if you satisfy certain rules. These rules are outlined by the IRS and your plan's rules, and must be met in order to qualify.

The money received from a hardship withdrawal does not need to be repaid, unlike plan loans. However, be prepared to pay income tax on the total amount of the withdrawal.

A hardship withdrawal for a 401(k) allows employees to withdraw money from their retirement savings before turning 59½ without the usual 10% early withdrawal penalty, as long as they meet specific IRS rules.

The penalty is waived for several reasons, but the withdrawn amount is still subject to regular income taxes unless it’s from a Roth 401(k).

A 401(k) hardship withdrawal is an early withdrawal from your retirement plan initiated under specific circumstances that demonstrate a heavy financial need. It's not a free pass to dip into your retirement savings whenever you want, but rather a way to access funds penalty-free if you satisfy certain rules.

The IRS has set specific rules for hardship withdrawals, and your plan's rules may also have stipulations that must be met to qualify. To qualify for a hardship withdrawal, you must have a 401(k) plan that permits hardship withdrawals, and employers are not required to allow them.

Hardship withdrawals can be used to cover medical expenses, pay tuition for yourself or a family member, prevent eviction or foreclosure, cover funeral costs, or repair damage to your primary residence. Purchases, such as vehicles or boats, do not qualify as an immediate and heavy financial need.

To qualify for a hardship withdrawal, you must exhaust all other reasonable sources of funds first. This means you may need to provide a written statement confirming that your needs can't be met through other readily available resources, such as insurance, liquidating personal assets, using your paycheck, taking out plan loans or reasonable commercial loans.

Here are the specific circumstances that may qualify you for a hardship withdrawal, as outlined by the IRS:

Keep in mind that each plan sets the rules around hardship withdrawals separately, so your 401(k) plan documentation is the best source to find out what qualifies for a hardship under your plan's rules.

To qualify for a 401(k) hardship withdrawal for medical bills, you must first confirm with your financial advisor or plan administrator whether your plan even permits hardship withdrawals. Not all 401(k) plans allow hardship withdrawals, so it's essential to check your plan documents.

To be eligible, you must have a 401(k) plan that permits hardship withdrawals. Employers are not required to allow hardship withdrawals, so access can vary from plan to plan. You'll need to contact your plan administrator to see if your plan permits hardship withdrawals.

You'll also need to demonstrate that you can't reasonably get money from another source to cover your medical expenses. This might include exhausting insurance, liquidating personal assets, using your paycheck, or taking out plan loans or reasonable commercial loans.

Here are the specific circumstances under which you can make use of a 401(k) hardship withdrawal for medical bills:

Keep in mind that hardship withdrawals are only an option if you can't reasonably get money from another source. Your employer may request a written statement from you certifying that you can't pay for your medical expenses from other resources.

If you've got medical bills piling up, you might be able to use a hardship withdrawal from your retirement plan to cover them.

You can take a penalty-free distribution to pay unreimbursed medical expenses that exceed 10% of your adjusted gross income.

The IRS allows you to use a hardship withdrawal for medical bills that aren't covered by insurance, including annual checkups, dental and vision treatments, prescriptions, and surgeries.

You must take the hardship withdrawal in the same year that you racked up the medical bill.

Medical expenses in excess of 7.5% of your AGI are eligible for the 10% penalty waiver if you need to use funds from your 401(k) to cover medical bills.

You can include the medical bill in your annual tax return, but you don’t have to itemize deductions to get the penalty waiver.

Retirement savers can take a hardship distribution to clear medical expenses, giving you some much-needed financial relief during a tough time.

Taking a 401(k) hardship withdrawal for medical bills can have significant financial implications.

You'll need to prove heavy financial need for the withdrawal to be approved by your plan advisor and the IRS, which can be a lengthy process. It can also take time to rebuild your savings, as you can only contribute a limited amount of money to your 401(k) each year due to IRS limits.

For example, in the 2024 tax year, you can contribute a max of $23,000 to your 401(k) account, with an additional $8,000 catch-up contribution if you're 50 and older. If you've taken a large amount out, it may take two years to put that amount back in if you're over 50 and maxing out your contributions.

Rebuilding your savings after a hardship withdrawal is crucial, and it's recommended to ramp up savings efforts as quickly as possible. This will help you sidestep common retirement savings mistakes and get back on track.

Financial hardship can significantly impact your living conditions or financial stability, making it difficult to make ends meet. Specific circumstances such as these might qualify you for withdrawals from certain plans.

You'll need to prove heavy financial need for the withdrawal to be approved by your plan advisor and the IRS. This can be a challenging process, requiring thorough documentation of your financial situation.

Some plans may allow withdrawals due to severe financial hardship, but these situations are typically evaluated on a case-by-case basis.

Rebuilding your savings after a 401(k) hardship withdrawal can be a long process, taking up to two years if you're over 50 and maxing out your contributions, and almost three years if you're under 50.

It's essential to ramp up your savings efforts as quickly as possible to avoid getting behind on your retirement savings.

You should contribute enough to your 401(k) to take advantage of an employer match, if possible, to make the most of your contributions.

Trying to max out your annual 401(k) contributions, including catch-up contributions if you're over 50, will help you catch up on your savings.

This period is really about trying to recover, focusing on getting yourself financially stable, and doing everything you can to catch up, as O'Shea says.

You'll want to strengthen your financial situation so you can avoid taking another 401(k) hardship withdrawal in the future.

It's recommended to start an emergency fund in four steps to help you avoid taking a 401(k) hardship withdrawal again.

You might be considering a 401(k) hardship withdrawal to cover medical bills, but it's essential to explore other options first. You would want to exhaust all other options first, as O'Shea says.

Using funds from a bank or non-retirement account makes sense instead of your retirement savings. Generally, this is a better option than depleting your retirement savings.

A 401(k) loan might be a better option than a hardship withdrawal, as it allows you to borrow against your savings without permanently reducing your retirement balance. Loans typically have lower fees and penalties than hardship withdrawals.

It's also worth considering how long your 401(k) will last in retirement, as depleting your savings now could impact your financial security in the future. Due to this factor, it's best to explore other options first.

You'll likely have to pay a 10% early withdrawal penalty on top of taxes when taking a 401(k) hardship withdrawal for medical bills. This penalty is in addition to the taxes you'll owe on the withdrawal.

Hardship withdrawals are considered taxable income for the year they're taken, which could push you into a higher income tax bracket. This means you may end up paying a higher marginal tax rate.

You may also have to pay an additional 10% early distribution tax if you're younger than 59½, unless you qualify for one of the exceptions. These exceptions include using the withdrawal to pay for unreimbursed medical expenses that exceed a certain percentage of your adjusted gross income.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 waived early withdrawal penalties for distributions up to $100,000 from retirement plans used to pay for expenses related to qualified, federally-declared disasters. However, this exception doesn't apply to medical bill withdrawals.

Here's a breakdown of the potential tax and penalty implications:

+ Death or total and permanent disability

+ Unreimbursed medical expenses exceeding a certain percentage of adjusted gross income