401(k) Hardship Withdrawals
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- 2 min read
Get Answers from Bills.com co-CEO about 401(k) hardship withdrawals.
Brad Stroh, CEO of Bills.com, answers a reader posed question, "What is a 401(k) hardship withdrawal?" If you have a question you would like to Ask Bill, simply click on the post comment button below the video.
Video Transcription;
"Thanks for coming to Bills.com and thanks for your question on 401(k) hardship withdrawals. First, let me start and explain what a 401(k) plan is. A 401(k) plan is typically an employer sponsored compensation program where you are able to set aside pre-tax dollars towards savings and ultimately a retirement plan which frequently is met by your employer. On average the median is about 50% of your contribution is met by your employer and could range from zero up to 100% of what you are contributing to your 401(k) plan.
Now, with respect to hardship withdrawal, what that means is if you have built aside or accumulated a significant amount of money in your 401(k) plan, and would like to withdraw those funds before the qualifying age of 59 ½ most typically, there is a 10% penalty plus you will be forced to pay the taxes that you would have paid on those, that compensations from your employer. There is only a handful of situations where you can take out those funds without the 10% withdrawal penalty, those include; Paying for uncovered medical expenses, tuition and college for you or a dependent, buying your first home, or to help you avoid foreclosure. Really what you should do though is talk to your plan administrator and seek advice from a counselor and figure out if a 401(k) hardship withdrawal is something you qualify for and if it’s the best thing that you can do with your money. Very frequently it is an expensive use of your money and if you could get access to a loan, refinancing a mortgage, or even sometimes a 401(k) loan against the balance of your 401(K). It is a lot cheaper use of capital and a better solution for many people. Thanks for your question and hope that helps."
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In general, yes. A 401(k) is a plan to defer income taxes, and not eliminate taxes altogether. See the IRS publication 401(k) Resource Guide - Plan Participants - General Distribution Rules to learn more. The real question is, "Must a disabled person pay the 10% penalty tax on a 401(k) distribution?" The answer is no if the disability qualifies. Again, see the IRS document I just mentioned to learn more.