Getting the most out of your 401k plan

“Hi, I just quit my job and would like to empty my 401k account to support me till I find a new one. I contacted my HR rep at the previous company and he told me that I was allowed to withdraw the money only in the case of a serious “financial hardship”. Is this true and what is the definition of a financial hardship with regard to withdrawing my 401k? Is there any other way I can withdraw my 401k apart from “financial hardship”?

– Tony Baker

Hi Tony,

This is not an uncommon question and I get quite a few asking the same thing. This particular question does the rounds because most employers fail to provide adequate information to their employees about the 401k plan. Especially,when it comes to withdrawal options and conditions.

Getting to the point now, the first thing you need to know, Tony, is that a 401k is primarily a retirement fund to help you out in your old age. It is not some sort of piggy bank savings scheme from which you can withdraw money whenever you like.

However, as your HR rep mentioned, the 401k fund can be withdrawn in case of a financial hardship. However, even hardship withdrawals come with a 10 percent penalty for early withdrawal and you will have to fulfill certain conditions. These conditions will also answer your question about the definition of a financial hardship.

So, financial hardship under 401k means covering costs related to medical expenses, funeral expenses, fixing damages to your primary residence, and to cover costs that prevent eviction or foreclosure. You can also claim a hardship withdrawal if you are planning to go to college. It will cover your tuition fees and other associated expenses such as accommodation or boarding.

The other withdrawal option is a penalty-free one, but you will be required to pay taxes equal to standard income tax rates. Just like the conditions in the previous hardship withdrawal option, the penalty-free hardship withdrawal also comes with certain conditions. They include covering costs in the case of a disability that prevents you from continuing your employment, medical expenditures within the allotted limit, and for court ordered payments towards divorced spouse, children or dependents. You can also claim the penalty-free hardship withdrawal if you have been allowed a relief by the IRS in the case of a disaster.

Penalty-free hardship withdrawals are also valid in the case of an early retirement. However you must establish a fixed regular withdrawal schedule for a period of 5 years or up to the age of 59.5, whichever is applicable in your case.

I suggest you do some research to know more about 401k withdrawals. Websites such as www.401keasy.com have a lot of information about 401k plans, including information about withdrawals. So, take a look and you’ll get to know your options.