Undertaking A 401k Hardship Withdrawal Process
A 401k plan is a type of retirement investment account that is offered by an employer to help employees monetarily when they reach retirement age. There is an option of making an early withdrawal of the capital under certain circumstances. If you are currently experiencing great financial difficulty due to an unforeseen situation, you may be allowed to initiate a 401k hardship withdrawal. This is permitted if you have no real option open to you apart from drawing on the investment funds to get through a period of monetary difficulty.
If you believe that this is a decision that you will have to consider seriously, first of all you need to make certain that your financial hardship would meet the qualification criteria. Understand that the provider of your 401k plan would have strict rules in place that govern the situations when a hardship withdrawal is permitted.
Any of the following predicaments and outlay can be a basis for a hardship withdrawal – emergency medical expenses, college expenses for a dependent, funeral expenses, and when extra capital is necessary to prevent a foreclosure on your main place of residence.
You will need to find out whether a Proof of Need document must be submitted to your current employer in order to be eligible for a withdrawal on the basis of hardship. If this is the case, speak to your HR manager to be made aware of the documents that would have to be provided. If your plan is termed as being “self-certification” it is unlikely that you would be asked to present a Proof of Need.
Before undertaking the withdrawal be clear on whether the funds that would be made available are large enough to meet your financial expenses. Removing capital to cover an economic hardship has strict rules which govern its activity. It is often stipulated that you must first explore other options to meet your hardship requirements prior to cashing out the 401k investment plan.
It should be noted that any early withdrawal from a 401k policy would result in tax liability. For this reason you should be clear on your tax bracket and have an accurate assessment of the amount of taxes that would be required to be paid. Under certain situations you may end up losing as much as thirty to forty per cent of the collateral due to federal and state tax laws.
Once you have carried out an early withdrawal and have met you financial hardship obligations you can then report the amount you have used on the following year’s tax return as gross income. If you are under any confusion as to how to do this you should seek advice from an experienced tax advisor.
Alongside the above mentioned rules and conditions, you will not be allowed to make further contributions to a 401k plan for a minimum of six months upon receiving the withdrawal money. This aspect of the policy is in place to deter applicants from considering an early withdrawal. Under the same rule no employer matching contributions will be given for the same amount of time.