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401(k) Fund Withdrawal Rules – Hardship & penalties

  • 4 min read

  401(k) Fund Withdrawal Rules – Hardship & penalties


For most people, a 401K fund is the biggest financial asset that they have outside of their primary residence or their home. Many people have tens of thousands, sometimes hundreds of thousands in a 401K. In some cases over a million dollars. This may represent the vast majority of their holdings. The largest percentage of their liquid holdings, meaning easy to access. Your primary residence, your real estate, may have equity and it may be your largest asset on paper. For your personal net worth however, it’s not easy to access that money.  Sure you can get a home equity loan or a line of credit but that may not be the primary way to go.  401K funds have ways you can withdraw from that while not actually cashing it out. Some of those withdrawal methods have penalties where you have to pay a fine for taking it out early. Here are some hardships & penalties:


There are some ways you can withdraw without a penalty:


If you have unreimbursed medical bills that you need to pay for, you can normally take money out from your 401K fund without paying a penalty. Similarly if you have a disability that you need to pay expenses for, you can normally take money from your 401K without having a penalty. Now remember penalty is different than interest. Our taxes I should say, so if you don’t pay a penalty that’s fine but you may have to pay taxes on it. Remember when you put that money in, you avoided income tax on that money. You may be taxed on your withdrawal. You may also be able to make a withdrawal for paying for health Insurance if you need to; no penalty but you probably have to pay tax. 


If you have a 401K holder that’s deceased, the beneficiaries can normally take withdrawals without paying the penalty. Taxes will still need to be paid.  Where this is going is that it’s a very common theme. Health or death have no penalties but you do have to pay taxes.


 A couple other exceptions that are not medical related:


If you have back taxes, have a tax lien, or if you owe money to the IRS for your taxes, you can normally take money from your 401K to pay that. The bottom line is that if you take or if you don’t take the money out they’re going to take it anyway. Might as well pay it if you’re a first-time homeowner and you want to use it as a down payment. You can take money out that may still trigger a penalty. If it’s a 401K but not an IRA. Some college expenses may be exempt. If you are an investor and you want to take some profit out, you may be able to do that on normal disbursements. A 401K is an extremely valuable wealth creation tool.  Just like your primary residence or other real estate. You have to manage the amount so you don’t have to take money out before you need it. If you run into a hardship and you have to remove money from that fund; you may lose tax benefits, lose investment value and in some cases pay a penalty.  Hope this helps understand the 401K fund withdrawal rules, hardship & penalties.

If you are looking for some legal advice, and want to some help in making smart decisions, schedule an appointment with one of our experts here.

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