Can I make monthly withdrawals from my 401(k) account due to financial hardship?
I am 56 years old and currently unemployed and may soon need to consider a hardship withdrawal from my 401(k) account. I anticipate that I'll need a partial sum to pay off outstanding loans and credit card debts totaling approximately $50,000. Can I then make monthly withdrawals from the balance in order to cover monthly expenses if needed?
The short answer is it depends on if your plan allows it. You can find out by contacting the plan provider or looking in the Plan Documents. Some plans may allow for withdrawals or loans where others will not. I would first look to see if you can take a loan.
You also have the option of rolling your account over into an IRA and taking a distribution if the plan doesn't allow it.
*Keep in mind that distrubtions will be taxable and you will also be subject to a 10% Early Withdrawal Penalty from the IRS
First, I am sorry to hear of your financial hardship. I encourage to contact your plan sponsor and initiate a direct rollover to an IRA. In fact, you can enlist the support of a Certified Financial Planner to assist you with this. I know that you want to access a lump sum to pay off the debt. Please note that your withdrawal will be subject to the early withdrawal penalty (10%) and taxes (ordinary income tax rates). I don't know the details of your specific situation, but you may want to explore Substantial Equal Periodic Payments (SEPP) because you mentioned that you will need monthly withdrawals to cover your expenses. Here is a link with more information about (SEPP).
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments.
Good luck to you!
There are a couple options the regulations may remove any penalty:
Regulation 72t allows someone make withdrawals from their 401k without a penalty. There are rules that need to be followed including: you must have payments made to you over a term of not less than 5 years or until age 59 ½ (whichever is longer). See IRS Pub 590
There is a second exception: If your funds are still at the company 401k where you were employed (not permitted for IRAs) and you left the company during or after the year in which you turned age 55, there is not penalty placed on the withdrawals. See IRS Pub 575
The 72t requires payment for a specified period of time, whereby, the 'rule of 55' seems to have more flexibility.
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Here is what you need to know regarding 401ks and hardships:
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.
Hardship withdrawals are subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.
A hardship distribution may not exceed the amount of the need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that may result from the distribution.
I hope this can help you on your way.
Matthew