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If unemployed, is there a way to use your 401k without ...

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If unemployed, is there a...
If unemployed, is there a way to use your 401k without penalties to cover expenses until new employment is found?
Submitted: 10 years ago.Category: Finance
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4/15/2007
Financial Professional: The Land Advisor, Experienced Land Investor replied 10 years ago
The Land Advisor
The Land Advisor, Experienced Land Investor
Category: Finance
Satisfied Customers: 1,387
Experience: Retired successful "land baron", financier and investor.
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There are a few, limited circumstances where a 401k penalty is NOT assessed by the IRS for early withdrawal. But a plan LOAN is penalty free if you eventually pay it back.

Here are the rules.

A hardship withdrawal is not like a plan loan. The withdrawal may be difficult to get, and costly if you receive it. Your 401k is meant to provide retirement income. It should be a last-resort source of cash for current expenses.

Knowing that workers would resist putting aside money for decades with no chance to access it, IRS rules allow plan withdrawals in a limited number of hardship situations. To further discourage early withdrawals, in some cases the IRS imposes a hefty financial penalty.

Two types of hardship withdrawals are permitted from 401k plans. One is called a financial hardship withdrawal. It is subject to applicable income taxes and a 10 percent early withdrawal penalty if you are younger than 59 1/2. These costs are significant.

The other is a penalty-free withdrawal made under Section 72(t) of the Internal Revenue Code. With this, you pay applicable income taxes but not an early withdrawal penalty.

Financial hardship withdrawals are allowed for the following reasons:

    * to buy a primary residence (the most common reason folks take hardship withdrawals according to the Investment Company Institute)
    * to prevent foreclosure or eviction from your home
    * to pay college tuition for yourself or a dependent, provided the tuition is due within the next 12 months
    * to pay unreimbursed medical expenses for you or your dependents

You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

    * You become totally disabled.
    * You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
    * You are required by court order to give the money to your divorced spouse, a child, or a dependent.
    * You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
    * You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

Employers are not required to offer either type of hardship withdrawal, so you should check with your employer to see which type, if any, is available to you.

This means that your financial hardship letter should set forth the facts of your situation. It doesn't have to be fancy language and it doesn't have to be lengthy. Just "tell it like it is" in your own words. Address it to your employer - have it delivered by "Certified Mail-Return Receipt" or by a courier like Fedex where you can confirm delivery. You can also deliver it in person, just have the personnel or finance office sign for it.

Once you take the money out, you can't put it back in. You lose for life the tax advantage for the withdrawn funds.

Non-Hardship Withdrawals

Not every plan allows non-hardship withdrawals. If yours does, you have an opportunity to take money out of your account and redistribute it as you see fit. Generally the best bet is to roll the amount into an IRA. That way you avoid taxes, and you have a larger range of investment options, usually with lower administrative fees. Rollovers made directly to the owner of the 401(k) must be reinvested in a qualified plan within 60 days or be faced with a 10% penalty.

Source: 401khelpcenter.com
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