SUMMARY
- Key differences between a 401(k) hardship distribution and a 401(k) loan
- Potential benefits of using 401(k) funds for urgent needs, debt consolidation, or a home down payment, as well as the potential tax consequences, penalties, and impact on long-term retirement savings
- Important risks to consider, including taxes, penalties, repayment rules, and reduced retirement growth
- Taking money from your 401(k) could affect future contributions and employer matching funds
- Other borrowing options to explore before using retirement savings, including personal loans, lines of credit, and lower-rate credit cards
A 401(k) plan is a powerful tool for retirement savings, offering tax advantages and employer contributions. However, life’s financial demands may tempt you to consider withdrawing money from your 401(k) accounts. Hardship distributions may be available for certain immediate and significant financial needs, subject to your employer’s retirement plan provisions and applicable IRS rules. Please note that, according to the IRS, you are limited to a hardship distribution in the amount necessary to satisfy that financial need.
Be aware that a hardship distribution is subject to income taxes (unless they consist of Roth IRA contributions). You may be subject to a 10% additional tax on early distributions if you do so before you turn 59½ years old.
Another way to tap into your 401(k) is to take a loan against your funds. Each employer’s plan is different, but you may be able to take out up to 50% of your vested account balance. You will have to pay back the borrowed money, plus interest, within 5 years of taking out your loan. Please check with your 401(k) administrator for complete rules.
Taking money out of your 401(k) may offer financial relief, but weighing the pros and cons carefully before doing so is essential. Visit IRS.gov to review important regulations, talk with your tax professional, and speak to your plan’s administrator to fully understand the plan’s rules, fees, and any penalties. Here are a few more pros and cons to consider:
Pros:
1. Access to immediate funds: One of the most significant advantages of withdrawing from your 401(k) is immediate access to funds. Whether you face an emergency, need to consolidate debt, or are considering a large purchase, the ability to tap into your retirement savings can provide necessary liquidity.
2. May help avoid borrowing from another lender: Taking a 401(k) loan may be an alternative to obtaining a loan from a bank, credit union, or credit card issuer. Because the funds are borrowed from your retirement account, interest payments are generally made back to your account. However, a 401(k) loan is still a loan that must be repaid according to your plan’s terms.
3. Depending on your circumstances, a 401(k) loan may have a lower interest rate than some other borrowing options: This is because the loan is effectively “self-financed,” as you’re borrowing from your savings. However, the interest you pay goes back into your 401(k), not to a lender.
4. Hardship distributions generally do not require repayment: If it is a hardship distribution, not a loan, you are not required to pay the money back to your 401(k) account. However, it is considered taxable income.
5. Help you get into a home: You can borrow funds from your 401(k) to help make the down payment on a home. Please note that there may be penalties and tax implications based on your circumstances, but the funds could be the financial bump you need to make the big move into home ownership. Using retirement funds for a home purchase may significantly impact long-term retirement savings.
Cons:
1. Penalties and taxes: As we’ve noted, withdrawing money from your 401(k) before age 59½ can lead to substantial penalties. Generally, you’ll face a 10% early withdrawal penalty in addition to ordinary income tax on the withdrawn amount. This can significantly reduce the amount you receive.
2. Impacts your retirement savings: Removing funds from your 401(k) can undermine your long-term retirement goals. The money you withdraw is no longer invested in the financial markets, so you could miss growth opportunities. This could result in a less comfortable retirement, as compounding interest and investment returns are critical for building a substantial retirement nest egg.
3. Loan repayment risks: If you separate from your employer before repaying your 401(k) loan, the remaining balance may become due under the terms of your retirement plan. Repayment requirements and potential tax consequences vary by plan and applicable law, so consult your plan administrator for details.
4. Reduced contributions: Taking out a loan or withdrawing from your 401(k) can impact your ability to make contributions. With less money in your account, you might find it challenging to maintain your regular contribution levels, potentially affecting your long-term savings strategy.
5. Potential impact on employer matching contributions: Depending on your employer’s retirement plan, certain rules or limitations may apply while repaying a 401(k) loan. In some cases, these limitations could affect your ability to make contributions and receive employer matching contributions. Because employer matching contributions can be an important part of long-term retirement savings growth, consult your plan administrator regarding any contribution restrictions that may apply.
A few ways we can help.
For some, taking a 401(k) distribution or loan may be the way to go. However, there are other, simpler options. Consider our Signature Loan. You can use the funds to pay for whatever you need, from making a major purchase to consolidating debt to educational costs, it’s up to you. You’ll have up to 60 months to pay off the loan, and you can borrow up to $40,000 at a rate as low as 9.99% APR* for qualifying borrowers who enroll in Direct Deposit and Auto Pay (If you do not enroll, rates as low as 10.99% APR).
Rather than being reactive, consider being proactive by establishing a line of credit. Having an established line of credit ensures you can access funds whenever you need them most. Our Signature Line of Credit gives you peace of mind. This variable rate loan starts at 10.74% APR** for qualifying borrowers who enroll in Direct Deposit and Auto Pay (If you do not enroll, rates as low as 11.74% APR).
A credit card is the most common go-to for paying for a financial hit. The advantage is that you probably have one in your wallet, it’s easy to use, and you don’t have to do any paperwork to access the funds. However,the average national interest on credit cards is currently about 23.79%.† Our Select Visa® offers rates as low as 8.99% APR††. And now, you can get a 0% intro APR for the first 6 months if you qualify‡. Whatever card you use, it’s important to pay off the balance as quickly as possible to limit how much interest you’ll pay.
Final thoughts.
Making a hardship distribution or taking a loan from your 401(k) can offer short-term financial relief, but it carries significant drawbacks that can impact your future retirement security. Weighing the immediate benefits against the potential long-term consequences is crucial. Before deciding, it’s wise to explore other financial options, such as a personal loan or line of credit. Whatever path you follow, please consult a financial and tax advisor, and the plan’s administrator before making a move that will affect your retirement goals.
This article is provided for educational purposes only and is not intended as financial or legal advice. Members should contact the Credit Union for guidance regarding their individual situation. Please consult a tax professional for the most current data and personal advice for your situation.
*, **APR = Annual Percentage Rate. Subject to credit approval. As-low-as APRs are available to qualified borrowers. Direct Deposit and automatic payment discount requirements apply where advertised. Variable APR may apply for line of credit products. No prepayment penalty unless otherwise stated.
†Schulz, Matt, “Average Credit card interest rate in America today,” Lendingtree.com. 19 May 2026. Accessed 8 June 2026.
††$100 Bonus for New Credit Cards for: Crystal Visa, Select Visa & Visa Platinum: A $100 (one hundred dollars) bonus will be paid in the form of “Visa Statement Credit” when at least $5,000.00 (five thousand dollars) is spent in purchases within the first 3 months (qualifying period) of the “New” Visa card opening. Bonuses will be paid out within 90 days after the qualification period. Example: If a card is activated on January 1, 2021 and the total of qualifying purchases for the months of January, February and March is at least $5,000, the primary borrower will receive a Bonus of $100 (one hundred dollars) no later than July 1, 2021. Limit of one reward/bonus per member number. Qualifying transactions must “post” to the designated account during the qualified period. All qualifying purchases will count towards the $5,000 in spent purchases unless return for credit of any of the qualifying transactions takes place within 90 days of the end of the qualifying period. Transactions may take two business days from the date of purchase to post. Member must be in good standing to be eligible for bonus. New accounts are subject to FIGFCU approval and all other terms and conditions apply. This offer is valid only for individual account /card holders, is non-transferable and cannot be combined with any other offer. The $100 Bonus is a product promotion sponsored by FIGFCU and may be discontinued at any time. Visa is a registered trademark.
APR = annual percentage rate. Rates are subject to change at anytime.
The balance transfer amount from other Farmers Insurance Federal Credit Union credit cards will retain its current rate (i.e., Select Visa at 8.99% – 18.00%, Visa Platinum at 10.99% – 18.00%, until the transferred balance is paid off. APR=Annual Percentage Rate. Rate quoted is the lowest rate possible for qualified borrowers and is subject to change. Qualification is based on credit history, debt, and the ability to repay. Your rate may vary. All loans subject to credit approval. The newly opened Credit Union credit card’s rate will only apply to new transactions. Any balances on the previous Credit Union credit card must be paid off at the prior credit card’s rate.
‡Zero Percent (0%) Introductory Rate Promotion for purchases, is offered for new FIGFCU Select Visa® Credit Card account holders. This incentive offer, is not available to those members who are opening a new Select Visa and had an outstanding balance or a closed FIGFCU Zero Percent Loan account and/or had any FIGFCU Select Visa® Credit Card within the last year. If you are in an introductory rate promotion period, you are not eligible to transfer other loan balances, line of credit balances, credit card account balances or CASH Advance to take advantage of the introductory rate promotion.
The program promotion may be modified, suspended or cancelled or may be changed at any time without notice and without restriction or penalty. Farmers Insurance Federal Credit Union reserves the right to change the promotion rates and program retention period from time to time. You will be notified of any expiration or program changes as required by law. Contact Farmers Insurance Federal Credit Union for details on applicable conversion to current rate and payment options which are then in effect. At Farmers Insurance Federal Credit Union’s sole discretion, the program offering of the program may be terminated, for any reason, including but not limited to a “Rules Violations”, your Farmers Insurance Federal Credit Union account is not in good standing or is suspected of fraud, or if you move to another Farmers Insurance Federal Credit Union credit card.
This program is void where prohibited or restricted by law. You are responsible for any federal, state, or local taxes.
Effective Offering Dates: Promotion period for Zero Percent (0%) introductory is effective for FIGFCU Select Visa® Credit Cards opened beginning July 20, 2020 through “until further notice”.
Loss of Introductory APR: We may end your introductory APR and/or apply the Penalty APR if you make a late payment or are Over limit.
Billing Rights: Information on your rights to dispute transactions and how to exercise those rights is provided in the Billing Rights section of the Visa® Credit Card Agreement.
Introductory rate and incentive offers for Select Visa®, are not available to those members who had an outstanding balance on a preexisting or closed FIGFCU Visa Credit Card account and/or had an FIGFCU Visa Credit Card within the last 12 (twelve) months. If you are in an introductory rate promotion, you are not eligible to increase limits until the introductory rate promotion has expired.
TERMS AND CONDITIONS The introductory Annual Percentage Rate (APR) Zero Percent (0%) will apply to purchases made during a promotional period of 6 (six) months from the date of opening of your Visa account. After this promotional period ends, 6 (six) months from the date of activation of your Visa account, your standard APR will apply to any remaining balance and to all new purchases and balance transfers. The terms of this introductory rate may not be applied to existing Farmers Insurance Federal Credit Union Visa accounts.
This promotional introductory offer is based on meeting Farmers Insurance Federal Credit Union’s criteria for creditworthiness. Farmers Insurance Federal Credit Union will review your credit and employment history and any other information permitted by law to process your application. The credit line on this account will be determined after a credit review of your application by Farmers Insurance Federal Credit Union and will be based on various factors, including income. FIGFCU maintains the right to not open this account if: a) the information provided is incomplete, inaccurate or cannot be verified, or if you do not meet Farmers Insurance Federal Credit Union’s standards for creditworthiness; b) your name and/or mailing address on the credit application have been altered; c) the income you reported on the application is insufficient to support the opening of this account; or d) you do not meet Farmers Insurance Federal Credit Union’s membership eligibility or “member in good standing” requirements. You have the right to review your credit history by contacting the appropriate credit reporting agencies.
Change in APRs, Fees and Other Terms: Farmers Insurance Federal Credit Union may change the APRs, fees and other terms of your account at any time in accordance with applicable law and the Visa Credit Card Agreement. Factors we may consider in determining whether and how to change your terms include, but are not limited to, a late payment or an extension of credit that exceeds the credit limit, the frequency and severity of defaults and other indications of risk on accounts with Farmers Insurance Federal Credit Union and other creditors. To the extent allowed by law, the change in terms will affect all outstanding balances. If we increase your APRs, the new APRs will apply only to new transactions you make after we notify you of the change in writing unless it is for default in terms as outlined above.
New members may experience temporary limits on certain payment methods. Contact us to make full payments without penalty.
