What if your employer doesn’t offer 401k loans or you are not eligible? It may still be possible for you to access cash if the following four conditions are met (note that the government does not require employers to provide 401k hardship withdrawals, so you must check with your plan administrator):
- The withdrawal is necessary due to an immediate and severe financial need
- The withdrawal is necessary to satisfy that need (i.e., you can’t get the money elsewhere)
- The amount of the loan does not exceed the amount of the need
- You have already obtained all distributable or non-taxable loans available under your 401k plan
If these conditions are met, the funds can be withdrawn and used for one of the following five purposes:
- A primary home purchase
- Higher education tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you)
- To prevent eviction from your home or foreclosure on your primary residence
- Severe financial hardship
- Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents
All 401k hardship withdrawals are subject to taxes and the ten-percent penalty. This means that a $10,000 withdrawal can result in not only significantly less cash in your pocket (possibly as little as $6,500 or $7,500), but causes you to forgo forever the tax-deferred growth that could have been generated by those assets. 401k hardship withdrawal proceeds cannot be returned to the account once the disbursement has been made.
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