The goal of contributing towards
a 401k retirement plan is for you to be able to retire
with a good solid income. This is proven by the fact that
401k plans allow you to take out a certain amount (maximum
limit of $15000 in 2006) from your Gross Income and contribute
it towards the 401k retirement account, allowing it to
grow tax-deferred.
However, do you have the option of
withdrawing this money before your retirement? What if
you need cash for an emergency such as death of spouse,
large medical bill or a home refinance mortgage? We suggest
that you make withdrawing money from a 401k as your last
possible option.
- Most 401k retirement plans do not
allow you to withdraw money unless you are facing some
kind of a financial hardship. This is why some 401k withdrawals
are also known as "401k hardship withdrawals."
The above mentioned reasons such as death of a spouse
(which is beyond human control) or a large medical bill
are valid financial hardships.
- Most employers set 401k withdrawal
rules with guidelines set up by Internal Revenue Service.
Therefore, if you have an immediate need for cash (supported
by an important reason), then you are eligible to make
401k withdrawals. Here are some of the reasons that allow
you to make 401k hardship withdrawals:
1) Large medical bills for you, your
spouse or family
2) Buying a house (your primary residence) - this excludes
the mortgage payments
3) Paying university and post-secondary school fees for
your children, dependents, spouse, etc
4) To prevent foreclosure of your home
Note: If you take a 401k hardship withdrawal
for any of these reasons, you will not be allowed to make
any annual 401k contributions for atleast 6 months. You
are therefore suspended from making 401k retirement contributions
for 6 months.
Thanks to the reforms brought about
by the Economic Growth and Tax Relief Reconciliation Act
of 2001, 401k hardships are:
- NOT eligible for rollovers (into
an IRA, etc)
- NOT subject to federal income taxes (however under certain
circumstances, if you withdraw money before the age of
59.5, you will be subject to 10% penalty fee as well as
local federal and state taxes).
