Should I withdraw from my profit-sharing plan or my 401(k) to avoid going into debt?
I recently lost my job and unemployment will be $275 per week. I have bills to pay and cannot afford them with this amount. Should I withdraw from my profit-sharing plan or my 401(k) to avoid going into debt?
This is exactly the reason why we hammer on clients to build and maintain an emergency fund. Taking money out of your 401(k) should always be a very last resort because not only do you have to pay ordinary income tax on the proceeds, but you're also liable for a 10% penalty for the premature distribution. With that said, if this is literally the only option you have to avoid racking up credit card debt or getting yourself in further trouble financially, then taking money out of your 401(k) is the way to go. If you can prove these funds are preventing you from being evicted from your apartment, then you may be able to qualify for a hardship withdrawal which would waive the 10% penalty, but there are no guarantees on that one. I hope you can find work and right this ship quickly!
This is an important decision which many people these days are facing so at the very least do not feel alone!
The first question is what prospects do you have for future employment? This will help you plan for how long you may need to be unemployed. If it looks as if it will be months or more then you may have to consider the options you asked about or others I will mention shortly.
The first action I would recommend that you take, if not already done, is to create a spreadsheet with all of your bills and other financial commitments with totals and minimum payments and due dates. This will let you know what you need to cover each month in detail. Knowing that you will need to see what income options you have already to cover these debts.
1) Look for any money owed to you from other people (Friends , Family, etc.) attempt to collect it.
2) Determine if you can borrow money from others, short term, to avoid withdrwing money from your retirement or profit sharing plan
3) If you determine you only or best option is to make a withdrawal from your retirement plan, note that based upon your age, if you are under age 59 1/2 years old you will be charged a 10% penalty withdraw money from your 401k plan in addition to paying the taxes immediately or at the end of the year for the money withdrawn. If this is your choice, borrow as much as you need and can afford to cover you for that balance of the time you expect to be unemployed.
4) Before opting to withdraw from your profit sharing plan make sure you check with your HR department to determiine what the eligibility requirements & restrictions are as they are different with each company. If you are eligible to make a withdrawal then again, withdraw as much as you need to cover the debt for the period you expect to be unemployed. If you have been at your company for a time and do qualify to withdraw from your profit sharing plan that may be the best option as the profit sharing plan has the employer contributions to you, versus making a withdrawal from your 401k, which is what you have contributed to personally.
Once this is done focus your attention on gaining new employement using all available connections, networks, social media, and employment entities available.
Hope this helps and best of luck to you on gaining new employment!