Times are tough. Many people are wondering what their options are when it comes to working their way out of a tough financial bind. Some are even considering taking out a hardship withdrawal on their 401K. What is this and should this be an option one should consider?
A hardship withdrawal is an option that will allow you to take money from your 401K. But it has to be approved by your employer. You also have to prove that you are in indeed suffering from a hardship and are in a real bind. What kinds of financial binds will generally qualify a person to be approved for such a withdrawal?
• Uncovered medical expenses
• College expenses
• Not being able to pay your mortgage and your home is about to go into foreclosure
What are the rules that will be applied to you and your 401K if you take out this hardship withdrawal on your 401K by the IRS?
• The amount you withdrawal is going to be considered taxable income come tax time. This means your taxes may raise or you may not get your usual refund.
• You will have to pay a 10% penalty for taking out the hardship withdrawal if you are under 55 ½ years of age. Most people who have to take out these hardship withdrawals are between the ages of 39 and 55 years of age.
• You are prohibited to make contributions to your 401K for six months after you take out this hardship withdrawal.
• You can’t replace the money you took out of your 401K.
Remember the above rules are not set by your employer, they are set by the IRS, and your employer has no choice but to abide by them.
Other options you may want to consider besides withdrawing from your 401K are:
• Taking out a loan against your 401K. This loan is not taxable, there is no penalty for taking it out and you can still contribute to your 401K.
• Roll your 401K into an IRA. IRA’s are considered taxable income.
Withdrawing from your 401K as a hardship withdrawal is a serious step to make. Please make sure this is your only course of action before doing so.
Note to remember if you are in a real financial bind, both IRA’s and 401K’s are exempt from bankruptcy.