Although the investor must still pay taxes on non-financial hardship withdrawals, the ten-percent penalty fee is waived. There are five ways to qualify:
- You become totally and permanently disabled
- Your medical debts exceed 7.5 percent of your adjusted gross income
- A court of law has ordered you to give the funds to your divorced spouse, a child, or a dependent
- You are permanently laid off, terminated, quit, or retire early in the same year you turn 55 or later
- You are permanently laid off, terminated, quit, or retired and have established a payment schedule of regular withdrawals in equal amounts of the rest of your expected natural life. Once the first withdrawal has been made, the investor is required to continue taking them for five years or until he/she reaches the age of 59 1/2, whichever is longer.
A 401k hardship withdrawal should be a last resort. An IRA, for example, has a lifetime withdrawal exemption of $10,000 for a house with no strings attached.
What is the maximum contribution limit on your 401k account? The answer depends on your plan, your salary, and government guidelines. In short, your contribution limit is the lower of the maximum amount your employer permits as a percentage of salary (e.g., if your employer lets you contribute 4% of your salary and you earn pre-tax $20,000, your maximum contribution limit is $800), or the government guidelines as follows:
401k Maximum Contribution Limits
2004: $13,000
2005: $14,000
2006: $15,000
Once the year 2006 has been reached, the total maximum contribution limit will be increased based on changes in the cost of living.
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