What is the least penalized way for an "under 55" to cash out his 401(k) early without quitting your job?

Question

I am under 55, and I heavily contribute to my 401(k). I know, I know... the longterm outweighs the shortterm, but I need to withdraw basically everything in my fund to take care of some essentials. What is the best way to do that without suffering the huge penalties?

Answer 1

Get a part-time job delivering pizzas or working in retail store during the holiday season in order to avoid withdrawing from the 401K. Drop any non-essentials in order to save $$.

Answer 2

Like loans, hardship withdrawals are allowed by law, but your employer is not required to provide for them in your plan. Again, most companies do, but some don't. The cost of administering such a program can be prohibitive for many small companies. Check with your Human Resources department if you're not sure if your plan allows hardship withdrawal. Like loans, your employer must adhere to some very strict and detailed guidelines.

The IRS code that governs 401k plans provides for hardship withdrawals only if: (1) the withdrawal is due to an immediate and heavy financial need; (2) the withdrawal must be necessary to satisfy that need (i.e. you have no other funds or way to meet the need); (3) the withdrawal must not exceed the amount needed by you; (4) you must have first obtained all distribution or nontaxable loans available under the 401k plan; and (5) you can't contribute to the 401k plan for six months following the withdrawal.

The following four items are considered by the IRS as acceptable reasons for a hardship withdrawal:

1. Un-reimbursed medical expenses for you, your spouse, or dependents.
2. Purchase of an employee's principal residence.
3. Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
4. Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
5. Beginning on January 1, 2006, you will also be able to make a hardship withdrawal for funeral expenses and repair of a primary residence.

Hardship withdrawals are subject to income tax and, if your are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.

Answer 3

You will be penalized no matter what, but you can take a hardship withdrawal (see reference). Most 401K programs have loan programs available that let you borrow against a portion of the balance, and you just repay interest and principal back into the plan. You should not mess with any of this, though, imho. It would be much better if you can get a home equity loan, a bank loan, or a credit card, and suspend payments into your 401K for a while if you have to.

Answer 4

You can always cash out a 401K as long as you pay the 10% penalty and claim it as income. You don't have to have a reason. However it is NEVER a good idea to cash out a 401K for any reason prior to 59 1/2 years of age. You will NEVER make that money up in your retirement and you will regret it greatly later in life. Either do with out or wait until you save the money for the downpayment but do not cash in your retirement.

Answer 5

1) Most employers will not let you take your money if you still work there. Some will in "hardship" situations. You will have to contact your HR person.

2) There is no way do get your money without paying taxes and penalties. Besides "Death" and "Disability" there are very few exceptions to the 10% Federal penalty and there are absolutely no exceptions to paying federal (and usually state) taxes on this money. Many people pay upwards of 40% of the distribution in taxes and penalties.

Answer 6

I don't know any way to avoid the 10% penalty unless you can qualify under one of the few hardship provisions. Remember that everything you withdraw becomes taxable income for that year. See www.401k.org.