What can be a consequence of taking a hardship withdrawal from a 401(k) plan?

Taking a hardship withdrawal from a 401(k) plan can lead to tax penalties and a loss of future contribution limits. When a participant withdraws funds for a hardship, the IRS typically considers this distribution as an early withdrawal unless specific conditions are met. This often results in a 10% early withdrawal penalty if the participant is under the age of 59½, along with the requirement to pay ordinary income tax on the amount withdrawn.

In addition to the immediate tax implications, taking a hardship withdrawal can affect the participant's ability to contribute to their 401(k) in the future. Many plans may impose a suspension of contributions for a certain period after a hardship withdrawal, which can limit the participant's ability to save for retirement effectively. This action can create a significant impact on the overall retirement savings strategy, leading to a smaller account balance when the participant retires.

Thus, the consequences of a hardship withdrawal are significant, encompassing both immediate tax penalties and longer-term effects on contribution limits, making this answer the most comprehensive choice regarding the implications of such a withdrawal.