Have you been affected by the U.S. government shutdown? Are you experiencing financial difficulties? If this is your case, then read through the various solutions to manage through this difficult time.
Should you consider accessing funds from your 401(k) plan during a financial emergency through a loan or hardship withdrawal to help solve an immediate need, be aware of consequences that can affect your long-term financial security. Let’s look at a few:
Many plans permit loans that you repay through payroll deductions as long as you remain employed. You’re borrowing your own money. Normally the term of a 401(k) loan is five years unless the money is used for the purchase of a primary residence, then some plans will allow borrowing for a 25 year term.
Advantages and disadvantages of borrowing from your 401(k) account.
The plus side:
The negative side:
The IRS allows withdrawals from the 401(k) for certain financial emergencies. However, it’s up to your employer to determine the specific criteria for a hardship withdrawal. These circumstances are:
You should consider a withdrawal from your 401(k) as a last resort!
Companies often prohibit contributions for at least six months after taking a withdrawal and those hardship distributions permanently reduce your account balance. Please remember that taxes are due on the amount you withdraw and will incur the 10 percent penalty if you’re under age 59 1/2. Additionally your plan administrator may follow up after the withdrawal to verify that the funds were used for the purpose indicated on your application.
Finally, you cannot be forced to use your 401(k) money to pay state and local income taxes, property taxes or other taxes, however, a court may order you to withdraw money from your 401(k) to pay child support, alimony and federal income taxes owed.
State and federal laws differ, so seek legal advice to determine which will apply.
Denise Garrett is a financial counselor at the LDCENY and has more than 25 years experience in financial counseling and retail banking.