How to Pay Medical Expenses With a 401k

If you're suddenly faced with medical expenses you're struggling to pay, you might be able to access the funds built up in your 401k to cover them. Medical bills constitute one of the "financial emergency" situations recognized by the IRS as a legitimate reason for needing your 401k money ahead of schedule.

Things You'll Need

• 401k account

Instructions

1. Approach your 401k account administrator and ask to review the terms of your Summary Plan Description (SPD). In the SPD, the exact circumstances under which you will be permitted to take money out of your 401k account are clearly stipulated. Medical expenses will almost always qualify as a legitimate financial emergency.

2. Meet whatever portion of your medical bills you can using financing from other sources. Because your withdrawal will likely be subject to IRS penalties, you should try to take as little as possible out of your 401k account.

3. Expect to face significant tax penalties for accessing the funds in your 401k before you reach the age of 59 1/2. According to federal law, any money you get from a 401k policy will be reported directly to the IRS and taxed at the same rate as your regular income. In addition, a penalty equal to 10 percent of the withdrawal amount will be levied by the IRS.

4. Pay your medical bills promptly, and don't use any of the money you took out of your 401k for any other reason. If you're audited and the IRS determines your actions violated federal law, you may be facing legal penalties more severe than taxes and 10 percent--namely fines and possible prison time.

5. Establish a long-term plan aimed at reinvesting the money you took out of your 401k back into your retirement. It's always a sound idea to keep the maximum you're allowed in your 401k account, so it continues to earn high, tax-deferred interest.

6. Explore avenues that allow you to borrow against your 401k rather than withdraw money directly from it. For example, you might be able to work with your employer's 401k loan program, if your company has one, to borrow the money you need for your medical expenses from the company rather than yourself.

Tips & Warnings

• Some 401k plans allow the money to be accessed for medical expenses that aren't necessarily life-threatening or, strictly speaking, medically necessary. For example, it may be possible for you to fund infertility treatments using 401k funds. Check with your account administrator.

• Personal finance professionals generally encourage individuals to leave their 401k plans alone unless it is absolutely necessary to access the funds early.