Learn How to Make a 401(k) Hardship Withdrawal in Few Steps

Dealing with money troubles can be super stressful, especially when it feels like there aren't many options. If you're under 59 , you might think about taking a 401(k) hardship withdrawal to cover your immediate needs. But before you do, it's really important to understand what that means, how it could affect your future finances, and what other options you might have. A financial advisor can help you plan for emergencies and tough decisions.

Other Alternatives to a Hardship Withdrawal

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Before you go for a 401(k) hardship withdrawal, check out other financial resources you might have. Using your savings, emergency funds, or selling non-retirement investments should be your first move. You could sell individual stocks, bonds, mutual funds, ETFs, or REITs. These options usually have fewer penalties compared to pulling money out of your 401(k) early, so they might be a better choice if you're in a tight spot.  You could also consider borrowing instead of withdrawing from your 401(k). A 401(k) loan, for example, gets paid back to yourself over five years. Other options include personal loans from banks or credit unions, or home equity loans, and lines of credit if you own a home. Borrowing from family or friends could work too, often with low or no interest, but make sure to set up a formal agreement to keep things smooth. It is always good to have good retirement expense planning.

Financial Implications of Such a Withdrawal

Taking money out of your 401(k) early can really mess with your retirement savings. The money you take out won't grow tax-deferred anymore, and a smaller account balance means less money when you retire. For instance, if a 30-year-old takes out $5,000 and the account would have grown at an average of 7% annually until they turn 65, they'd miss out on about $54,000 in growth. This big hit to your future savings is why you need to think hard before taking a hardship withdrawal. Also, remember the automatic tax withholdings. When you take a 401(k) hardship withdrawal, the plan will automatically withhold 20% for taxes, but your actual tax bill might be different. Plus, some plans might not let you make new contributions for up to six months after the withdrawal.

The Process of 401(k) Hardship Withdrawal

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Before you go ahead with a hardship withdrawal, check out your plan's rules since not all plans offer this option, and the steps can differ. Usually, you need to have no other financial resources left and show that you have an urgent financial need. To start a hardship withdrawal, you generally need to:

• Prove your financial need by collecting necessary paperwork like medical bills, tuition statements, or foreclosure notices.
• Get in touch with your plan administrator to request the withdrawal, filling out the required forms and providing supporting documents.
• Only withdraw the amount you need to cover the hardship because taking out more than necessary isnt allowed and can hurt your retirement savings.
• Look into all other options, like loans or financial assistance programs, before going for a hardship withdrawal.

The time it takes to process hardship withdrawal requests can vary, usually between seven to 10 business days, but some plans might take up to 30 days to review and approve the request.

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Reasons Allowed for 401(k) Hardship Withdrawal

It's basically an early dip into your 401(k) savings that you can take out in certain tough situations. Not all retirement plans allow these, so you gotta check your plan's rules.

The IRS says a hardship withdrawal needs to meet two things:

• It's gotta be for an "immediate and heavy financial need."
• The amount you take out has to be just enough to cover that need.

Heads up, these withdrawals are taxed, and sometimes you get hit with a 10% early withdrawal penalty. Wondering what counts as a qualifying expense? The IRS lists six main reasons:

Home Damage

You can use a hardship withdrawal to cover repairs on your main home if it's hit by something unexpected, like a natural disaster, fire, flood, earthquake, or severe storm. The amount you can take out is limited to the repair costs after insurance or other payouts. The 10% penalty applies here too.

Funeral Expenses

You can also use it for funeral costs for yourself, your spouse, kids, dependents, or a beneficiary. This includes services, burial, cremation, and related expenses. The 10% penalty kicks in for these too.

Eviction or Foreclosure

If you're about to get evicted or face foreclosure on your main home, you can take out a hardship withdrawal. Youll need proof like an eviction or foreclosure notice. The amount is limited to what's needed to stop the eviction or foreclosure, but yep, the 10% penalty still applies.

Education Expenses

Got tuition, fees, room and board, or other postsecondary education costs coming up? You can use a hardship withdrawal for the next 12 months of these expenses for you, your spouse, kids, dependents, or a beneficiary. The 10% penalty applies here too.

Principal Home Purchase

If you're buying your main home, you can use a hardship withdrawal for costs like down payments and closing fees, but not for mortgage payments. The amount you can take out is capped, and the 10% penalty usually applies. However, first-time homebuyers can pull up to $10,000 from their IRA without the penalty.

Medical Expenses

If you have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, you can take a penalty-free hardship withdrawal. This can cover surgery, hospital stays, treatments, prescription meds, and emergency dental work for you or your dependents.

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Other Tips for Managing Your 401(k) Funds

• Getting help from a financial advisor can make picking investments for your 401(k) a breeze. You don't have to stress about finding one either. SmartAsset has a free tool that connects you with up to three financial advisors in your area, and you can chat with them for free to see who fits best. If you're ready to get some expert advice to hit your financial goals, go ahead and start now.
• Knowing your investment options in your 401(k) plan is key to managing it well. Even though you might have limited choices for individual securities, you'll probably have a range of target-date funds. These funds adjust their asset mix to become more conservative as you get closer to retirement.

Conclusion

Taking a 401(k) hardship withdrawal can give you quick financial relief for things like medical or funeral costs, but it's important to think about how it will affect your retirement savings in the long run. A 401(k) hardship withdrawal should be one of your last options. You'll need to balance the immediate benefits with the long-term impact on your retirement security.

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