Removing funds from your 401(k) before you retire because of an immediate and heavy financial need is called a hardship withdrawal. People do this for many reasons, including:
- Unexpected medical expenses or treatments that are not covered by insurance.
- Costs related to the purchase or repair of a home, or eviction prevention.
- Tuition, educational fees and related expenses.
- Burial or funeral expenses.
The IRS is making it easier to access the funds in your 401(k) by amending the rules around hardship withdrawals. But hardship withdrawals are a drain on your hard-earned retirement savings, and they stunt all the growth you’ve previously achieved. They can even impact your ability to retire when you want.
Factor in the taxes
If you’re under 59½ years of age, your money will be subject to taxation and a 10% penalty. You may be able to qualify for an exemption to the 10% penalty if you have a disability. Contact your tax professional for more information.
Factor in your feelings
It’s easy to avoid thinking long-term when making choices while feeling anxious or limited. Take a few moments to breathe and gather your options together – there may be more than you think. Then, make an informed decision you can feel good about.
Factor in the future
Your 401(k) is a promise you make to yourself for the years to come. For well-being, quality of life and proper care. Each month, you hold to that promise by investing money for your future. If you choose to remove even a small amount of savings from your 401(k), your current problems may go away, but you may have created challenges for your future self and family.
If you need emergency funds now, there could be other ways to find them.
Action steps:
- Don’t panic or act without thinking.
- Contact your tax professional.
- Search for other ways to find emergency funds.
- Talk to a financial advisor to get started.
