Can You Withdraw Your 401(k) to Get Out of Debt?

You can only use a 401(k) to pay certain debts.

A 401(k) is a retirement investment account that may be offered to you through your employer. In some cases, individuals can withdraw funds from their 401(k) accounts early to make necessary purchases or repay debts.

Facts

Strict government rules exist that restrict 401(k) withdrawals to certain circumstances.
If you are in danger of losing your home to foreclosure or have outstanding medical debts, you may qualify for a financial hardship distribution, according to the Internal Revenue Service.

Considerations

Your employer can request written proof of your debt, known as a "proof of claim," before allowing you to cash out your 401(k) plan.

Options

Rather than cashing out your entire 401(k) account, you may be eligible to take out a loan from your retirement fund that you can pay back over time.

Taxes

You must pay taxes on the amount of money you pull from your 401(k). This will often result in you receiving a distribution amount of much less than the account originally contained.

Misconceptions

Each employer's 401(k) withdrawal rules may differ. Your 401(k) plan may not allow you to make withdrawals until retirement or may place strict limits on what situations qualify you for a hardship withdrawal.

Warning

In addition to paying taxes, pulling money from your 401(k) prior to retirement will cost you a 10 percent early withdrawal penalty.

References

• IRS.gov: Retirement Plans FAQs Regarding Hardship Distributions
• SmartMoney: Got a 401(k) Question?

Resources

• CNN Money: Debt Reduction Planner