Suppose you need to borrow money in a hurry and your only obvious option is a bank loan with sky-high interest — if you can even obtain one. Consider an unusual source: your 401(k) plan or IRA.

These accounts are meant to provide income for retirement, so they should not be “raided” without good reason. As a last resort, however, a 401(k) or IRA could provide the funds you desperately need.

With an IRA, you can take out the money without restraint, because it’s yours to do as you wish. But you can only withdraw funds from a 401(k) with your employer’s approval (if it’s even permitted). The list of reasons you can make a hardship withdrawal includes:

  • Unreimbursed medical expenses for you, your spouse or dependents
  • Acquisition of a principal residence and certain expenses for repairing damage to your principal residence
  • Payment of college tuition and related educational costs (e.g., room and board) for the next 12 months for you, your spouse, dependents or children who are no longer dependents
  • Payment to prevent eviction from your home or foreclosure on the mortgage of your principal residence
  • Funeral expenses

In any event, a distribution from a 401(k) or IRA is subject to federal income tax at ordinary income rates. In addition, a 10 percent tax penalty generally applies to most payouts prior to age 59½.

There are several exceptions to the 10 percent penalty that may or may not align with the reasons for hardship withdrawals. For instance, you might be able to avoid the penalty on early distributions from a 401(k) to pay emergency medical expenses, but not to pay your child’s college tuition for the upcoming school year.

A hardship withdrawal is typically never someone’s first choice, but sometimes it’s the last option. Consider all your other options before moving ahead with a hardship withdrawal. Call us today if you’d like talk about your options.