Oct 10, 2008 12:23 pm US/Eastern
CBS4 Your Money: Hardship Withdrawals From A 401K
MIAMI (CBS4) ―
You've been faithfully building your 401k plan at work, but you suddenly find yourself with a financial hardship. This leaves you wondering whether it's possible to make a 401k
hardship withdrawal. The answer is not quite that simple.
The purpose of 401k plans is to encourage individuals to save for retirement. Tax law allows someone to fund the plan with pre-tax dollars and allows that money to grow on a tax-deferred basis until withdrawal. In exchange for the tax shelter that a 401k plan provides to employees, tax law restricts the withdrawal of that money before age 59 1/2.
Some 401k plans will allow employees to withdraw funds for any reason. Typically, these 401k withdrawals are limited to the elective portion of the deferral, and not any income or interest on the deferred amounts. However, these types of plans are more the exception than the rule. Money can be withdrawn from a 401k account if a financial hardship exists, and only in very limited situations. There are tax implications that one must be aware of.
The exact rules followed by each 401k plan will vary, but generally a financial hardship is deemed to exist if a participant in the plan experiences an immediate and heavy financial burden. In addition, the participant must have no other financial means of meeting this hardship.
To learn more about the tax implications, one should talk to tax consultant or visit the
IRS on this subject.
(© MMVIII, CBS Broadcasting Inc. All Rights Reserved.)
