Hardship Rules for Cashing Out Your Retirement

401k Hardship Withdrawal

• When you participate in a 401k plan with your employer, you may have the option of taking money out of your account when you experience a hardship. A financial hardship could come in many forms, such as the death of a loved one, an injury or a home foreclosure. When you need money for a financial hardship, your plan may allow you to take a taxable distribution from your retirement account. If you are younger than age 59 1/2, you may also have to pay a 10 percent early-distribution penalty on the amount withdrawn.
  
  

IRA Withdrawal

• Individual retirement accounts (IRAs) do not have a specific provision for hardship withdrawals. However, you do have the option of taking money out of your IRA at any point. You are in charge of administering your retirement account, and money can be taken out at your discretion. When you take money out of a traditional IRA, you will have to pay a 10 percent early distribution penalty if you are not yet age 59 1/2. The money will also be taxable as ordinary income since you have never paid taxes on it. If you withdraw money from a Roth IRA before age 59 1/2, your contibutions can be withdrawn tax-free, because you have already paid income tax on them, but the withdrawal of any earnings on those contribuions will incur the 10 percent penalty.
  
  

Penalty-Free Withdrawal

• When you have a 401k, you may be able to qualify for a penalty-free hardship withdrawal in some cases. With a penalty-free hardship withdrawal, you do not have to pay the 10 percent early-withdrawal penalty, even if you are younger than age 59 1/2, but you still must pay income taxes on the amount you withdraw. Some situations that may allow you to take a penalty-free distribution are becoming totally disabled, having medical bills larger than 7.5 percent of your income and becoming separated from work after the age of 55. If you have a court order that requires you to give the money to a divorced spouse or child, you will not have to pay the penalty either.
  
  

Alternatives

• When you need money to pay for a financial hardship, you may not need to take a hardship distribution. If your 401k plan offers it, a loan may be a better approach. With a 401k loan, you do not have to pay taxes or a penalty on the withdrawal. You simply pay the money back into your 401k account over time. Another option is to roll your IRA over to another provider. When you do this, it gives you 60 days to use the money before it has to be deposited into another account. During that time, you are free to use the money. However, you must roll over the full amount of your withdrawal into the new IRA within that 60-day window to avoid early-withdrawal penalties and income taxes.