Smart Ways to Withdraw Funds from 401k Savings

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Every person has faced a financial crisis at some point in his or her life. No matter how much you plan, the unexpected expense always seems to crop up and having some extra money available to use in those situations is a comfort. This is why it’s smart to set aside at least some part of your income each month into a special “rainy-day” fund.

But sometimes the unexpected expense is a major one and more than just the special fund is needed. In cases like that it’s useful to have access to an extra amount of money. And, if you have a 401k savings plan, that’s where a 401k hardship withdrawal can come in handy.

Now your 401k is designed for your retirement savings – it’s not designed to be a rainy-day fund. It exists as a vehicle for family wealth management. Therefore you can’t just withdraw money from it any time you want to. There are specific 401k rules that come into play. But, exceptions exist and you can take advantage of them if you need to.

The first thing you should realize is that the government charges a hefty penalty on early withdrawals (any withdrawal you make before you turn 59 and 1/2). That penalty is an extra 10% tax on the withdrawal amount. So if you withdrew $1000.00 you’d have to pay a $100.00 tax penalty on it which means you effectively only withdrew $900.00.

The next thing to understand is that your withdrawal is also taxable as regular income. So that $900.00 you had left over from above would be taxed at whatever your normal tax rate is. This further reduces the amount of money you end up with in hand.

Lastly, you can’t withdraw the money unless it’s for some very specific needs. Generally you can only use it for expenses that have to do with medical bills, certain home costs or bills, tuition expenses for qualified family members, or funeral costs. So a 401k withdrawal is not for everyone.

Whoever manages your 401k plan will also have some rules in place to govern withdrawals. That’s usually your employer and they can be downright picky. They may require some sort of certification by you that the money is indeed needed for a specific expense. And then they may also restrict the ways in which you can participate in the plan going forward.

As an alternative to 401k hardship withdrawals, some people turn to 401k loans. These are loans that basically use your 401k balance as collateral. The benefit to these financial vehicles is that they aren’t taxed and they don’t restrict your further participation in the 401k plan itself. The downside is that if you leave your employer for another job, you must repay the loan or it’s considered a withdrawal.

So, within certain limits, your individual 401k can be used as an emergency savings fund. But it’s important for you to understand the actual limitations your 401k account has before you consider using it for that “rainy day.” Do yourself a favor and discuss your options with a qualified tax professional before you make your decision.

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401k, 401k account, 401k hardship withdrawal, 401k loans, 401k plan, 401k rules, 401k savings plan, 401k withdrawal, family wealth, family wealth management, hardship, individual 401k, retirement savings

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