Some plans allow you to make an early withdrawal,
called a hardship withdrawal,
if you can prove that your financial
circumstances are dire enough. However, you may find that applying
for a hardship withdrawal is not worth the time, effort, or money.
To qualify, you must prove that your emergency
meets the IRS’s stringent standards for financial hardship,
such as a medical emergency or a tuition payment that is due within
12 months. You must also show that you can’t reasonably get
the money you need any other way.
Once your withdrawal is approved, it’s
likely you’ll be able to take out only the contributions
that you made yourself. Plus, you'll owe state,
local, and perhaps federal income taxes on the money.
You may also owe a 10% penalty on the full withdrawal
amount if you’re younger than 59 1/2.
If you’re making the withdrawal to pay
unreimbursed medical expenses, the penalty may be waived if your
medical expenses exceed 7.5% of your adjusted gross income (AGI) and aren’t covered by insurance.
A double hit
For six months after you make a hardship withdrawal,
you may not be able to contribute to your 401(k) plan, and when
that year is up, you may be able to make only limited contributions
for the remainder of the calendar year. This restriction could
prevent you from rebuilding your 401(k) assets quickly after your
financial emergency is resolved.
