Pros and Cons of Cashing Out Your 401k

In today’s economy, many people are trying desperately to make ends meet. Many have to borrow against their 401k retirement plans because of job losses or other reasons just to pay the mortgage and recurring bills. There are advantages and drawback to cashing out a 401k. Depending on your needs, there are three ways to use your 401k savings plan. You can take out an Regular 401k loan, a Hardship withdrawal, or a Non-Financial Hardship withdrawal.

The good news about a Regular 401k loan is that taxes and the 10% penalty fees do not apply, unless there is a default. This type of loan must be paid back within 5 years. If you have purchased a home, you will have a longer period for repayment. If you have a spouse, you must have their consent before the loan will be approved.

One possible inconvenience of a Regular 401k loan is the repayment process. If you quit your job or if your job is terminated, you must repay the loan in full within a sixty day period. If you do not meet the repayment deadline, the 10% penalty fees and taxes will apply by default.

If you have urgent financial needs, you may qualify for a Hardship withdrawal from your 401k. The IRS has strict guidelines on how these funds are to be used. You must present supporting facts and verification to your 401k administrator, indicating that a critical or urgent need exits for the withdrawal. A Hardship withdrawal is subject to taxes and penalty fees.

A Non-Financial Hardship 401k withdrawal is subject to taxes but no penalty fees are charged. You may qualify if you become permanently disabled; your medical bills top 7.5 percent of your gross income; a court order to forfeit the funds to your spouse or child; your job has been terminated, you quit or you retire early and have reached age 55 at some point in that year.

A withdrawal from a 401k should be a last resort. The 401k is intended for your retirement income, so you should start contributing again as soon as possible.