Most Americans plan for retirement by investing into a 401k plan.
But the investment is not like others, you will be heavily penalized if you try to withdraw the money earlier than retirement age. In some cases, your money cannot be accessed at all expect in extreme hardship cases such asmedical emergencies, educational expenses or payments necessary to prevent eviction or foreclosure and proof needs to be provided.
However, if you are fortunate enough to have a non-hardship withdrawal clause in the terms of your 401k agreement, you got a lucky break.
What is a non-hardship withdrawal?
Some 401k plans have the flexibility of non-hardship withdrawal meaningyou do not have to prove hardship to access your money. By law, annually employees are required to receive a copy of their 401k "Summary Plan Description" and that document will mention whether or not your 401k plan comes with a non-hardship withdrawal policy. To avoid taxes and penalties from the withdrawal of you 401k money you need toplan on rolling over the money into another retirement plan or IRA.
What restrictions does a non-hardship withdrawal have?
There are typically restrictions limiting the 401k non-hardship withdrawal including:
- Withdrawal amounts typically cannot be greater than your vested account balance.
- After making a withdrawal you may not be allowed to make plan contributions for up to twelve months
- There may be a limit on the amount you can contribute to your 401k in following years
- Caps may limit the quantity of or amount of withdrawals made
The bottom line
Even though there may be options for tapping into your 401k for non-hardship withdrawals, it may be a good option just to leave the money as is and keep your hands off.
Many 401k plans have been negatively impacted by the negative downturn of the stock market. The better strategy would be leaving your money where it is and riding out the financial storm.
