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What to Expect When Making an Emergency 401K Withdrawal

There may come a time when you will need an emergency 401K withdrawal. Even though the experts, your family and friends advise against it, when an emergency happens and you need the money there may be no other choice. So you need to know what to expect and the information you will be required to provide if you decide to proceed with this withdrawal.

Most plans allow you to take out a loan on your 401K, and some will even let you withdraw the money without having to pay it back. However, when you withdraw money without paying it back, you have to pay taxes and a 10% penalty for early withdrawal.

The way to avoid the taxes and the penalty for early withdrawal is to take out a loan instead. The interest and principal are relatively easy to pay back on loans, because you already have regular deductions coming out of your paycheck.

Loans can be paid back over a 5 year period, so if you take out a loan, give yourself plenty of time to repay it. The more time you take, the less your monthly payment.

Emergency 401K WithdrawalSomething else you need to consider is that the interest you pay on your loan is secured by the pretax deferrals, therefore it is not deductible. You can not claim it on your taxes.

If you’re making your emergency 401K withdrawal because you are really strapped for money, and paying back a loan is more than your finances can handle, then you should consider looking into a hardship withdrawal.

A hardship withdrawal has no penalties, but it still has draw backs. First – you have to qualify, and second – only certain situations are considered to be a hardship. If you’ve tried to get money from other sources and failed, and your financial situation is urgent, then you may qualify for a hardship withdrawal if you…

  • Need to pay extreme medical expenses
  • Need money to buy a home you’re going to live in
  • Need to pay for funeral expenses
  • Need to stop a foreclosure on the home you’re living in
  • Need to pay school tuition or other fees for anyone in your family
  • Need to stop an eviction from your residence

The above conditions were established by the IRS, so there is no getting around them. You also need to know that the amount of your hardship withdrawal won’t exceed the amount you actually need.

Also be prepared to show proof or documentation of the reason you need the hardship withdrawal. Such as copies of your bills. There is a lot of red tape involved with an emergency 401K withdrawal, but this is their way of making sure your claim is legitimate.

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