Cashing 401K while still employed?

Question

I have a client who has gotten behind on her mortgage payments by a few months. She is unable to refinance at this time due to pre-payment penalties on her current mortgage sending the payoff over equity. She wants to cash in her 401K, and yes she understands the very high penalties/taxes/fees involved. Her employer will not allow her to do so unless she provides a letter of forclosure for a hardship loan against the 401K. She would prefer her home not go into forclosure at all and just wants to pay it now. Every day that passes, she is charged more fees from her mortgage company for being behind. What can she do?

Well, that's what I thought too. However, her employer told her she could borrow against it, but only if she provided a foreclosure letter. The reason she doesn't want to wait on that letter is the amount of fees she is racking up each day, plus whatever fees she will incur once the foreclosure process has begun.

Answer 1

Unfortunately, only way to get $$ out of a 401k is through a loan and/or a hardship withdrawal. Sounds like your clients employer is using the "Safe Harbor" standards that are used to determine hardship necessity. Those rules say that it is ok to provide a hardship withdrawal for "payments to prevent eviction from or foreclosure on a mortage on the participant's principal residence". They say nothing about it having to already gone into foreclosure. I would say that your client should request a notice from the mortgage company showing that she's in arrears and how much time before the company plans to foreclose. She can explain to the company that she intends to get a hardship withdrawal to pay up her mortgage but needs that notice.

Keep in mind that this hardship withdrawal may be limited only to the contributions that your client put into the plan and may not be the entire account balance. Many times people think they have access to more funds than they really do.

Lastly, you say she's aware of the fees. But most are not aware of the rules. Hardship withdrawals have a 10% penalty associated with them. This is not applied when the distribution is taken, rather when your client files her tax return for the year. Your client can increase the hardship amount requested by the 10% penalty. Make sure she does this if the cash is available. Additionally, she can elect the amount of withholding taken from the distribution. If she doesn't elect they will withhold 10% and this won't be enough. She can gross up the distribution for this too. So, If she is behind 5k in mortgage payments and is in 20% tax bracket she should gross up her distribution to $7,144 and have the extra 2,144 withheld for taxes. That way she won't be suprised next April.

Added after: That letter from mortage company can be faxed...hardship withdrawals can be expedited with checks sent overnight. If she's polite and pushes she can have cash in hand in 3-5 days. Key though is to get that letter. Do not say "is there any other way" The employer is only allowing distributions and loans for hardship reasons. So your client has to prove the hardship. Only other way is to quit and that may take longer than jumping through this little hoop!

Answer 2

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RE :Cashing 401K while still employed?
I have a client who has gotten behind on her mortgage payments by a few months. She is unable to refinance at this time due to pre-payment penalties on her current mortgage sending the payoff over equity. She wants to cash in her 401K, and yes she understands the very high penalties/taxes/fees involved. Her employer will not allow her to do so unless she provides a letter of forclosure for a hardship loan against the 401K. She would prefer her home not go into forclosure at all and just wants to pay it now. Every day that passes, she is charged more fees from her mortgage company for being behind. What can she do?
Update: Well, that's what I thought too. However, her employer told her she could borrow against it, but only if she provided a foreclosure letter. The reason she doesn't want to wait on that letter is the amount of fees she is racking up each day, plus whatever fees she will incur once the foreclosure process has begun.
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Answer 3

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RE :Cashing 401K while still employed?
I have a client who has gotten behind on her mortgage payments by a few months. She is unable to refinance at this time due to pre-payment penalties on her current mortgage sending the payoff over equity. She wants to cash in her 401K, and yes she understands the very high penalties/taxes/fees involved. Her employer will not allow her to do so unless she provides a letter of forclosure for a hardship loan against the 401K. She would prefer her home not go into forclosure at all and just wants to pay it now. Every day that passes, she is charged more fees from her mortgage company for being behind. What can she do?
Update: Well, that's what I thought too. However, her employer told her she could borrow against it, but only if she provided a foreclosure letter. The reason she doesn't want to wait on that letter is the amount of fees she is racking up each day, plus whatever fees she will incur once the foreclosure process has begun.
Follow 11 answers

Answer 4

Contrary to the answer above, not all employers allow routine borrowing against employees' 401k balances.

Step 1 - ascertain that she has no other borrowing options - is there a local lending institution that will help her out? Credit Unions have FAR more flexible borrowing policies than banks and tend to be more receptive to issues such as this.

Step 2 - has she considered asking her employer for an advance on her salary? If she has a sufficient performance history and track record with the employer to have built up a solid 401k balance, then her employer may grant her an advance.

Step 3 - can she borrow from relatives? Friends?

Step 4 - second job possibilities?

Step 5 - does she have other IRA's or 401k's that she can tap?

Step 6 - can she get advances on her credit cards?

Step 7 - does she have a car that is paid off that she can borrow against?

It is hard to suggest detailed solutions without further information, but the above is a start. Good luck!

Answer 5

Federal law probits cashing out a 401k in partial or total while employed at the firm you are contributing to in a current plan. Your client has two choices, one bad and one good:

1. Resign, quit. She can then cash out as much as she wants.
2. A smarter solution is to borrow against her 401k. Most companies allow an employee to borrow between 33-50% of their total savings, and arrange a repayment plan with interest back to themselves.

Answer 6

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RE:
Cashing 401K while still employed?
I have a client who has gotten behind on her mortgage payments by a few months. She is unable to refinance at this time due to pre-payment penalties on her current mortgage sending the payoff over equity. She wants to cash in her 401K, and yes she understands the very high penalties/taxes/fees...

Answer 7

She can ask 4 hardship & her employer has no right whats so ever 2 deny this I know cause mine tried I called the 401K phone number & they'll helped me out & I even got them to close my account & I opened a 401K at my bank she can transfer all her funds there i did & there is nothing her employer can do about it cause I know about this cause I did it.Tell her to be strong say her Prayers & God Bless Her..Good Luck

Answer 8

She can borrow from her portion of the 401K anytime. her employer should have nothing to do with it. if she is not vsted that is another issue. if she is employed and is in ths situation do to some marital thing, she might pursue a refinancing to make it more affordable. if this is US, visit www.NACA.com or www.naca.org. it is a home buyers advocacy group.

Answer 9

thanks to each and everyone of you guys for the replies!