what is a hardship withdrawal 
a hardship withdrawal is an emergency removal of funds from a retirement plan sought in response to what the internal revenue service irs calls an immediate and heavy financial need 1 this type of special distribution may be allowed without penalty from such plans as a traditional individual retirement account ira or a 401 k provided the withdrawal meets certain criteria regarding the need for the funds and their amount 21however even if the irs penalty is waived it s a 10 penalty for distributions made before age 59 the distribution will still be subject to standard income tax unless it s a roth account the irs and most employers who offer 401 k s impose stringent criteria for these distributions to limit when they may be used and their amount and the rules that govern such withdrawals and who administers them differ by the type of retirement fund hardship withdrawals from irasthe irs will waive the 10 penalty for early withdrawals that is before age 59 from an ira in two situations purchasing a home for the first time and pursuing higher education 2unlike say a loan you take from your 401 k the funds from a hardship withdrawal cannot be returned to your account even if your financial position improves 4hardship withdrawals from 401 k swhether you can take a hardship distribution from your 401 k or 403 b plan and for which reasons is up to the employer who sponsors the program a retirement plan may but is not required to provide for hardship distributions the irs states 2 if the plan does allow such distributions it must specify the criteria that define a hardship such as paying for medical expenses or funeral expenses your employer may ask for documentation of your hardship if your employer permits a withdrawal for a particular reason irs rules govern whether the 10 penalty for withdrawals made before age 59 will be waived as well as how much you re allowed to withdraw these conditions are similar to those governing waivers for ira withdrawals but there are some differences 5hardship withdrawal alternativesif you re younger than 59 and considering a withdrawal from your retirement account you do have another option that would allow you to avoid the 10 penalty a substantially equal periodic payments sepp plan here s how it works the funds you wish to tap are placed into the sepp plan the plan will then pay you annual distributions for five years or until you turn 59 whichever comes later as with hardship withdrawals only the 10 penalty is waived you re still liable for paying income tax on the early withdrawals 6note this option requires a long term commitment to early withdrawals because the irs requires individuals to continue the sepp plan for at least five years this is not a solution for those who seek only short term access to retirement funds without penalty if you cancel the plan before the minimum holding period expires you re required to pay the irs the penalty that was waived under the program for the years that were penalty free plus interest for that period 3also funds held in an employer sponsored qualified plan such as a 401 k can be used in a sepp only if you no longer work for the sponsoring employer 6 and once you start a sepp program on a retirement account you may not make any additions to or take distributions from the account any changes to the account balance with the exception of the sepp and required fees may result in a modification of the sepp program and could be cause for disqualification by the irs and again the imposition of the 10 penalty that was waived plus interest 3despite these limitations a sepp plan is worth considering in cases where you need to tap funds early among other pluses a sepp plan may be less restrictive regarding how you spend the funds you withdraw without penalty when compared to hardship withdrawals 