Will Withdrawing From Your 401K Cause More Hardship?

Money Matters: Will Withdrawing Cause More Hardship?

I’d like to make a hardship withdrawal from my Fidelity 401(k). How much will I be charged in penalties and taxes? I have roughly $14,000 to take out.

–T. Sneed

If you really need the cash, and there are no other funding sources available to you, check with your employer’s human resources department to see if you can take a loan from your 401(k)–instead of making a hardship withdrawal. Not all employers allow it, but if yours does, you can borrow up to $50,000 or 50% of your balance (whichever is the lesser amount), according to Fidelity Investments. The cash will come directly out of your account and won’t be subject to taxes or penalties. You can arrange to pay the loan back (plus interest) by way of automatic payroll deductions. Beware: You’ll pay taxes on the outstanding loan amount if you leave your employer before paying back the full amount borrowed.

Why do I recommend borrowing money from your 401(k) rather than just withdrawing it? The taxes and penalties on a withdrawal can be brutal–even in a hardship case. Not only that, you’ll have to document your hardship and prove you have no other means to handle your financial need. The IRS limits hardship withdrawals to medical emergencies, costs related to buying a principal residence, tuition or other education fees for you or a dependent, or certain types of damage repairs to your principal home. Your employer’s plan may allow other hardships. If you’re younger than 59 1/2, you could pay a 10% early withdrawal penalty depending on your circumstances. Talk to your benefits administrator at work to review your plan’s specific policies.

John Simons is the Personal Finance editor at Black Enterprise.