Would a hardship withdrawal from your 401(k) be a good solution for you?

If you still have a job, there are only two ways to get money out of your employer's 401(k) plan: borrow it or take a hardship withdrawal. A loan has two big advantages--it's not taxable if you pay it back and the payments you make allow you to rebuild your account. The big disadvantage is that you have to come up with the money to pay it back.

A hardship withdrawal may meet your needs if you qualify and your plan offers them. The key elements to qualify are that you must have an immediate and heavy financial need and that the withdrawal is necessary to meet the need. For example, preventing foreclosure or paying big medical bills might qualify. Thomson Reuters offers some insight  into how these withdrawals work. A key point is that you will owe regular income tax plus the 10% penalty for withdrawals if you are younger than 59 1/2.

It's always best if you can save your retirement money for retirement--you're probably going to need it then. However, sometimes there are reasons you can't do that.

 

Comments

[Mr. Bill]

Just to be accurate, a loan or a hardship withdrawl are not the only ways to get money out of a 401(k) account while remaining employed.

To get a start on two annuities that each hae an annual raise in return -- so there would be a few years' growth before I retire -- I rolled out what was termed an in-service, non-hardship withdrawl. Though the company handling our 401(k) said I was the first to do so with my employer, they had a list of over 400 companies they work with whose employees had done the same. It is legal under the federal rules.

I am past the 59 1/2 age and I had no problem. I don't know how easy it is for younger employees.

This type of withdrawl is of no use to someone who needs the cash, but I just wanted to point out it is another way to take money out of the account without closing the account and leaving the job.