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401(k) Plan Hardship Distributions - Consider the Consequences

Many 401(k) plans allow you to withdraw money before you actually retire for certain events that cause you a financial hardship. For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse’s, your dependents’ or your primary plan beneficiary’s:

  • medical expenses,
  • funeral expenses, or
  • tuition and related educational expenses.

However, you should know these consequences before taking a hardship distribution:

  • The amount of the hardship distribution will permanently reduce the amount you’ll have in the plan at retirement.
  • You must pay income tax on any previously untaxed money you receive as a hardship distribution.
  • You may also have to pay an additional 10% tax, unless you are age 59½ or older, or qualify for another exception.
  • You may not be able to contribute to the plan for six months after you receive the hardship distribution.

Remember, a 401(k) plan is designed to help you save money for your retirement while you’re working. You should consider the consequences before dipping into your retirement savings.

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Page Last Reviewed or Updated: 20-Aug-2013