401(k) Hardship Withdrawals: Know the Stakes

A sudden job downgrade or an expensive medical bill could leave you desperately looking for an immediate source of income.

Your 401(k) should be the last place you look for quick money. But if you’ve exhausted all other options, and your employer plan allows hardship withdrawals, you might have no choice but to tap into your 401(k) retirement plan to help ease your financial burdens.

Before you do:

• Comb the fine print in your 401(k) plan to find out what qualifies as a hardship. Usually, it must be an immediate and heavy financial need pertaining to certain expenses.

• Find out if you are eligible to take a hardship withdrawal. The IRS says you must exhaust other, specific options first.

• Learn how much money is available to you. It’s usually restricted to the amount you have contributed to the plan, without earnings, but not always.

Be aware that:

• For a period of time you may not be able to make new pretax contributions and could miss out on all or some employer matches during that time.

• You will have to pay taxes on the amount you receive, based on your tax bracket.

• You may have to pay an early withdrawal penalty.

• In addition to the penalty, your plan might charge a fee to take a hardship withdrawal.

Don’t go into this without understanding the consequences. In some situations, it may be worth taking the hardship withdrawal, but it should be your last resort. Consult with your HR department and your tax and financial advisers; and evaluate your alternatives with a Cy-Fair FCU Loan Consultant.