It’s no secret that the economy has taken its toll on many and in many different ways. We’ve all been hindered by its sluggish progress and if you’re like many others, you’re looking for ways to ease your financial pain.
A hardship withdrawal from your 401(k) may be one way to go, however, even though you’re accessing your own money, it may be difficult to get your hands on.
Typically when an employee opens a 401(k), they do so with the intention of building that investment up to use to live comfortably when they retire. However, what many don’t plan on is using that money during a financial hardship. However, there are several things you should consider before using your retirement funds to overcome a financial hardship.
- The IRS imposes a stiff withdrawal penalty of 10% if you are under the age of 59 ½.
- The process can’t be started until you initiate it through your employer. This can mean revealing private information as part of a “Proof of Need.” An addendum to this is that there is another option, called “self-certification” that your employer may opt for. A “Proof of Need” is typically used less than “self-certification” but it varies from employer to employer. Before you start the process, talk with your employer – typically your HR personnel and they will let you know the process and which they prefer.
- A hardship withdrawal may satisfy an immediate emergency situation, but you must also consider the long-term ramifications. For example, if you use the self-certification method to complete your hardship withdrawal, you will be forbidden from making new contributions to your 401(k) for six months, which also means you will be missing out on any employer-matching contributions.
- Perhaps the worst consequence for withdrawing from your 401(k) is the fact that you will have less money in your account when the time comes for your retirement.
While these are just some of the things you should be concerned with when it comes to a hardship withdrawal, your best bet is to discuss your options with your accountant.
He or she can sit down with you and look at your entire financial situation and help you make the best decision.