401k Withdrawal Rules

Other than Social Security, for many American workers, their 401k retirement plan is their only source for retirement money. Which makes some recent numbers disturbing...

According to giant investment manager Fidelity, 2.2% of workers have made a hardship withdrawal from a 401k in the last year. And the number of participants with loans outstanding is now 22%: both at or near records.

Borrowing money from a 401k isn't a great idea. That's because if you leave your job, that money is going to have to be paid back immediately. Plus, it's obviously not there to compound interest for you anymore. Even still, loans are still better than hardship withdrawals.

When you take money out of your 401k, if you're under 59 1/2, you'll pay a 10% federal penalty. You'll pay taxes: federal, state and even local depending on where you live. And the money's no longer there.

So a hardship withdrawal is really a last resort. Think of any number of things that would be better. Borrowing from your 401k, a home equity loan, even a stop contributing to your 401k so you have more money to take home.

SOURCE