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When an employee takes a hardship withdrawal from a 401(k) plan, one significant consequence is the penalties and tax implications associated with that withdrawal. Generally, hardship withdrawals are not subject to the same favorable tax treatment as regular withdrawals. Employees may face a 10% early withdrawal penalty if they are under the age of 59½. Additionally, the amount withdrawn is typically considered taxable income, which means that the employee will owe income tax on the funds they withdraw in the year it is taken. This can substantially reduce the net benefit of the withdrawal.

Moreover, while it may seem that the withdrawal does not impact future contributions directly, the financial strain of taking funds out now can result in a lower overall savings rate and diminished contributions over time, since those funds will not be available for future investment or growth within the account. Thus, while the immediate concern with hardship withdrawals tends to focus on penalties and taxes, the long-term implications can also affect the employee’s retirement savings strategy significantly.