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A Guide to 401k Hardship Withdrawals

Sometimes, individuals may come across an emergency or a dire circumstance that requires an immediate withdrawal from their retirement fund. However, before deciding to withdraw from the 401k, individuals should consider the requirements that may qualify them for a hardship withdrawal. In order to qualify for a hardship withdrawal, the individual must be in immediate and dire financial need, and the amount withdrawn must be used to meet that need.

When can you Use a Hardship Withdrawal?

The majority of employers discourage employees from withdrawing from their 401k accounts. In most cases, if individuals need to withdraw, they can do so in the form of a loan. If an individual chooses to take a loan, it must be repaid in a few years, and are subject to hefty taxes and penalties. However, some plans may not allow their employees to take out loans.

In the case of an emergency, an individual may qualify for certain types of withdrawals. First of all, individuals should check to see if their 401k permits for a hardship withdrawal. There are two types of hardship withdrawals that individuals can use; the financial hardship withdrawal and the non-financial hardship withdrawal. A financial hardship withdrawal is subject to taxes and penalties, if withdrawn before a certain age. Individuals can qualify for a financial hardship withdrawal if used for purchasing a home, preventing foreclosure on a residence, or paying for tuition or medical bills. One the other hand, individuals taking out a non-financial withdrawal are not required to pay any penalties, but may still need to pay taxes. Non-financial withdrawals can be taken out in the cases of disabilities, court-mandated payments, or whether you’re terminated at a certain age. For individuals looking for more information, the Internal Revenue Service provides a useful FAQ on hardship distributions.

What If I don’t qualify for A Hardship Withdrawal?

If you need to take out money from your account, then you may want to consider whether you can quality for a 401k loan. One of the most common mistakes that an employee can make is to withdraw from an account when changing jobs. Individuals miss out from the capital they could have earned from compounding and allowing the nest egg to mature. But when there are no other options available, you may have to withdraw from your account.

For most 401k plans, individuals can choose to take a loan up to a maximum of $50,000. Generally, these loans must be paid back within five years, or longer if the loan is taken to purchase a home. One important tip to keep in mind is that individuals will still have to pay interest on the loans taken out of their own 401k accounts. However, this interest will eventually be paid back into their accounts, which can occur in the form of disbursements. Though a loan can grant you access to much-needed cash, a disadvantage may arise from the decreased rate of return on your account. To find out more information about withdrawal options, individuals should explore the resources provided by the US Department of Labor.