401(k) Hardship Withdrawals for Home Repairs

My house was damaged in a big storm, and I need to make major repairs, some of which won’t be covered by homeowners insurance. Most of my savings are in my 401(k). Can I withdraw money from the account to cover the costs?

You generally can’t withdraw money from a 401(k) until you leave your job. But because you need the cash for home repairs caused by storm damage, you may qualify for a hardship withdrawal. The rules for hardship withdrawals vary widely from plan to plan. Some plans don’t allow them at all. Others let you take up to the amount you have contributed if you need the money to satisfy a "heavy and immediate financial need," according to the IRS, for major expenses, such as home repairs resulting from a casualty loss (which includes storms, fires and floods), a home purchase or uninsured medical expenses. Your employer may require documentation of the cost.

There are disadvantages to most hardship withdrawals. Not only are you drawing down retirement savings, but unless the money comes from a Roth 401(k), it will be fully taxed in your top tax bracket and you will owe a 10% early-withdrawal penalty if you are younger than 59½. In most cases, you must stop making new 401(k) contributions for up to six months after taking out the money (that requirement was waived for Hurricane Sandy victims).

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Instead, take a 401(k) loan. Generally, you can borrow 50% of your balance, up to $50,000, for any reason without taxes or penalty, and you have five years to repay the loan. The interest goes back into your account. One caveat: If you leave or lose your job, you usually have just 60 to 90 days to repay the loan or it will be taxed and subject to a 10% penalty if you are younger than 55.

For more information about sources of financial help after a natural disaster (both for damages that are covered by insurance and those that are not), see 8 Steps to Help Get Your Hurricane Claim Paid Quickly.