The 401K hardship rules are what you want to check into before making a decision to apply for a hardship withdrawal. Many 401(k) plans allow employees to make a hardship withdrawal because of immediate, heavy financial needs. Generally, hardship distributions from a 401(k) plan are limited to the amount of the employee’s elective deferrals only, and do not include any income earned on the deferred amounts. Hardship distributions are not treated as eligible rollover distributions.

A hardship withdrawal is not like a plan loan and may be difficult as well as costly to obtain. Remember, your 401(k) is meant to provide retirement income. It should be a last-resort source of cash for expenses before then. The 401k hardship rules allow plan withdrawals in a limited number of hardship situations. To further discourage early withdrawals, in some cases the IRS imposes a hefty financial penalty.

Each 401k hardship rule is classed under one of two types of permitted hardship withdrawals. The first is called a financial hardship withdrawal. It is subject to applicable income taxes with a 10% early withdrawal penalty for anybody younger than 59 1/2. The other is a penalty-free withdrawal made under Section 72(t) of the Internal Revenue Code. With this second style of withdrawal, you pay applicable income taxes but not an early withdrawal penalty. The rules are tight, though, so be sure you follow them strictly.

Other financial hardship withdrawals are allowed for the following reasons: buying a home, preventing foreclosure, paying college tuition, or paying medical expenses over a certain limit. (Though with health care apparently up in the political air, who knows how long that provision will last.) Remember: employers are not required to offer either type of hardship withdrawal, so double check first! See which type, if any, is available to you.

True financial hardship usually does not exist when the participant only attempts to establish that the repayment of money causes a financial burden. That means your burden of proof must be greater than simple inconvenience. To discourage using 401k plan funds for anything other than retirement, effectively all early withdrawals are subject to the 10% penalty mentioned earlier. This penalty essentially makes your tax bracket jump; the withdrawal automatically incurs income tax, only it now includes the 10% penalty. If you think you can meet certain hardship criteria, then look into it. The tax code will occasionally permit penalty-free withdrawal.

401k hardship rules usually require a participant to avoid using hardship withdrawals, permitting them only after all other options are exhausted. Such options include loans, the withdrawal of after-tax savings or money in their account, and other possible openings. As with any financial decision that could weigh heavy on your future, consult with your 401k plan administrator and a tax advisor.

Don’t let yourself be faithful in planning your 401k plan only to face a financial burden. Take the time to look at all your options. The 401k hardship rules not only steer you in the right direction but help guide you as you change paths in your financial planning.