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According to the IRS, to qualify for a 401(k) hardship withdrawal, you need to show an immediate and heavy financial need. This definition is subjective, and ultimately, it's up to your 401(k ...
Deciding When To Make Your 401(k) Withdrawal. It’s always best to keep money in your 401(k) until you reach age 59 ½. Waiting gives your money more time to grow and lets you avoid paying a penalty.
A hardship withdrawal allows the owner of a 401(k) plan or a similar retirement plan — such as a 403(b) — to withdraw money from the account to meet a dire financial need.
Generally, a 401(k) participant may begin to withdraw money from his or her plan after reaching the age of 59 + 1 ⁄ 2 without penalty. The Internal Revenue Code imposes severe restrictions on withdrawals of tax-deferred or Roth contributions while a person remains in service with the company and is under the age of 59 + 1 ⁄ 2 .
However, unlike traditional 401(k) plans, the investment returns and benefits in Roth accounts remain tax-free. Additionally, unlike traditional plans, Roth 401(k) plans do not mandate withdrawals at a certain age. Retirees have the flexibility to choose when and if they withdraw their accumulated assets.
Based on 401(k) withdrawal rules, if you withdraw money from a traditional 401(k) before age 59½, you will face — in addition to the standard taxes — a 10% early withdrawal penalty. Why?