Along with your IRAs and real estate investments, your 401(k) fund can be a pillar of your retirement planning.

Accounts like 401(k)s exist to shield your savings from taxes while your money grows for the future. When you retire, you can start withdrawing from the account to replace your earned income and live more comfortably.

But what if you can’t wait until you retire to tap into the account?

What if you’ve had a slew of unexpected medical bills and now you can’t afford to pay them off?

What if your daughter lost her financial aid and will have to drop out of college if you can’t pay this year’s tuition?

Or what if you need to move and the housing market in your new town makes it harder to buy a new home?

Should you continue to struggle in the present while your 401(k) plan keeps its eyes on your future?

Ideally, yes, you should find another way to solve your current financial problems without jeopardizing your financial security during retirement.

We can’t always achieve this ideal, though, so 401(k) rules allow for what’s called hardship withdrawals.

What Qualifies as a Hardship Withdrawal?

Each person’s idea of a financial hardship may be different.

For some, being unable to give to a valued charity this year fits the definition of a hardship. For others, getting three months behind on the mortgage triggers a hardship.

Rather than letting account holders decide, the IRS has provided its own definition of a financial hardship serious enough to allow for an early 401(k) withdrawal.

To be eligible for a hardship withdrawal from your 401(k), your financial hardship must be the result of one of the following:

• Medical: Unexpected medical expenses for yourself, your spouse, or your dependents which are not covered by insurance or medical spending accounts meets the IRS’s requirements.
• Housing: This category includes several scenarios: Costs directly related to buying your principal residence, but not including making monthly mortgage payments; money to prevent being evicted or foreclosed upon at your primary residence; or money needed to repair severe damage to your home not covered by insurance, but not costs to repair normal wear and tear.
• Education: College tuition or other educational expenses such as room and board for yourself, your spouse, or your dependents, for the next 12 months.
• Final expenses: Burial or funeral expenses for the account holder, your spouse, or your dependents.

Other Ways the IRS Prevents 401(k) Hardship Abuse

The IRS has other rules you’ll need to follow before making a hardship withdrawal from your 401(k). The bold type below comes directly from the IRS’s Web site:

• The withdrawal must meet an immediate and heavy need: This stipulation helps define hardships as current and serious problems and not anticipated or minor problems.
• The withdrawal must be the only option available to meet the need: Have other options to solve the problem? You should exhaust those first.
• The withdrawal must satisfy the need, amounts in excess of the need are not permitted: This means you can’t withdraw a little extra to smooth things over for a few months. The withdrawal must be used exclusively for the specified hardship.
• The withdrawal cannot come before all non-taxable distributions or loans have been obtained from the 401(k): You’ll have to wait until after you’ve gotten your scheduled distributions (if you’re old enough to be receiving distributions) before seeking a hardship withdrawal.
• Contributions to the 401(k) are prohibited for six months following the hardship withdrawal: This one’s self-explanatory, and it prevents account holders from getting unfair tax breaks when they could have simply used the money they were depositing to resolve the financial issue. However, this rule expires in 2019.

You’ll Need Your Employer to Make it Happen

Since your employer administrates your 401(k) plan you will need to ask your employer to facilitate the hardship withdrawal.

If you work at a medium to large company, your firm probably has a human resources office. At a small company, find out who maintains the benefits program and start there.

It’s also possible your employer has contracted with a third-party to manage human resources. In that case, you may need to make a phone call or fill out an online request form.

If you need to provide documentation to prove your hardship meets the IRS’s requirements, your plan administrator should let you know.

Not all employers allow hardship withdrawals from 401(k) accounts they manage. The IRS allows hardship withdrawals but it doesn’t require companies to allow them.

If your company won’t allow a withdrawal, you may want to appeal to your supervisor requesting a policy change or else continue looking for other solutions to your immediate problem.

401(k) Hardship Withdrawals: Pros & Cons

Like any important financial decision, you should take a few minutes to think about the pros and cons of making a 401(k) hardship withdrawal.

Advantages of a Hardship Withdrawal

The advantage of making a hardship withdrawal is clear and simple: You can access your own money in case of a qualifying emergency.

This can prevent the hardship from getting worse, and it can keep you from seeking solutions like loans or credit cards which often come with high interest rates.

Also, unlike a 401k loan, hardship withdrawals do not have to be repaid into your 401(k) account, so you won’t be adding another monthly loan payment to your budget.

Drawbacks of Hardship Withdrawal

Even when you have a great reason to withdraw money from your 401(k) before retiring, the fact remains that you are taking a distribution from your retirement account for purposes other than retirement.

By taking money out of your account now you’re preventing that money from growing into the future, which is one of the main reasons to have a 401(k) account.

And hardship withdrawals are not free. Treated as a distribution, the hardship withdrawal is subject to income tax and the 10% early withdrawal penalty if you are not at least age 59 1/2.

Is a 401(k) Hardship Withdrawal Right for You?

Will the short-term benefits of taking money from your retirement account outweigh the long-term consequences?

Only you can answer that. As a general rule, tapping into retirement savings should be avoided whenever possible.

But hardship withdrawals exist for a reason. If you’ve determined the withdrawal makes sense for your situation, you can proceed as you see fit.

Scenarios When Withdrawing Makes More Sense

Only you can know your precise situation, but here are some scenarios in which a hardship withdrawal may make more sense:

• If you expect a sizeable tax refund and can therefore more easily absorb the taxes you’d be assessed on the withdrawn money.
• If your monthly budget simply won’t allow the addition of another loan payment from either a 401(k) loan or a commercial loan from your bank or credit union.
• If the money you’re saving in your 401(k) plan represents a less significant portion of your retirement plan. If, for example, most of your retirement savings is in other investments you can’t access.
• If you’re 59-½ years old or older since you can avoid the 10 percent distribution penalty.
• If you’re permanently disabled and can withdraw money penalty-free (though not tax-free).

Scenarios When Withdrawing Makes Less Sense

Again, your situation is unique and you should treat it that way, but here are some times when hardship withdrawals may make less sense or be ill-advised:

• If you are filing for bankruptcy: You should leave your 401(k) money alone since your 401(k) account could shield those assets from seizure. Your bankruptcy attorney should advise you about these specifics.
• If you have not saved or planned for retirement in any way other than your 401(k) account.
• If you already expect to owe taxes next year and are not sure how you’ll pay them.
• If you are younger than 59-½ years old and would lose an additional 10 percent of the withdrawal in penalties.

Weigh your options carefully and look at your individual needs, both current and future, as you make this decision.