How to Get Money Out of a 401K Plan
When they are experiencing a financial setback, many people turn to their 401k plan to make ends meet. Getting money out of your plan is fairly easy if you are no longer working for the plan sponsor. However, if you are still employed, it may be a little trickier. But there are still ways to tap into you 401k, such as applying for a hardship loan using your 401k as collateral.
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Instructions
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Contact your 401K plan administrator and request a withdrawal. Most plans will allow you to withdraw funds only if you are no longer employed with the sponsor. Ask your 401k administrator what their policy is. If you don't want to withdrawal the entire amount, you can roll the remaining funds into an IRA account. Simply contact your financial institution, and they will assist you in completing the required paperwork.
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Read disclosures for your plan. Once you request a withdrawal from your 401K account, your administrator will send you disclosures. These include tax information and early withdrawal penalties associated with your account. Once you read the information, contact your plan administrator, who will complete the withdrawal process.
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Apply for a hardship exception to withdrawal funds. If you are still currently employed with the plan sponsor, you may not be allowed to withdraw funds. But you can request a hardship exception, which will require you to provide documentation that you need the funds because of financial conditions. Examples of such conditions include a spouse's job loss, medical bills or other extenuating circumstances.
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Consider taking out a loan against your 401k. Typically, plans will allow you to take out a loan of up to 50 percent of your vested amount. Loans are usually repayable within 5 years, unless you are using the money for a down payment on a house.
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When receiving your 401k funds, hold back taxes. Although your plan administrator will often hold back 10 percent for taxes, you may be liable for more depending on your tax bracket. Holding back an additional 20 percent will safeguard you from unexpected tax bills at the end of the year.
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Tips & Warnings
Keep your eyes out for tax forms. Your 401k plan administrator is required to report your withdrawal to the IRS, and will send you income forms for completing your tax return.
Try to avoid tapping into your 401k plan. Allowing your money to stay in a retirement plan or IRA will give you the benefit of compounding interest and time. Try not to withdraw early unless absolutely necessary.
