Difference between 401k loan & 401k hardship withdrawal

What is the difference between a 401k loan and a 401k hardship withdrawal?

Time and unforeseen occurrence befall us all, and sometimes a situation requires spending money that we don’t have in our checking account. If you are a 401k investor, you probably know that 401k loans and 401k hardship withdrawals are two options that could help you in your time of need.

Financial experts recommend avoiding both of these options if at all possible, but if you are left with no other choice then it’s good to know how to borrow against a 401k while doing as little damage as possible to your retirement dreams.

401k Loans

Taking out a 401k loan is easier than getting a hardship withdrawal approved. The 401k loan system also allows you to borrow more money - up to 50% of the account balance or $50,000, whichever is less. The IRS allows you five years to pay back a 401k loan, with interest.

Another feature that many people like about 401k loans vs. 401k hardship withdrawals is that you can continue to contribute to your 401k even while your loan is outstanding. You’re not required to pass a credit check, either, because the money is technically yours.

If you retire or get fired while you have an outstanding 401k loan, however, be aware that you will likely be required to repay the entire amount of the loan, with interest, within two months. If you can’t settle the outstanding balance within two months, then the IRS treats your loan as an early withdrawal, thus leaving you with a hefty tax bill and a possible 10% penalty if you are age 59 ½ or less. While most of us would like to think that our jobs are safe, anything can happen in today’s economy. This is why many people look to take out a personal loan or open a line of credit at the bank instead of getting a 401k loan.

401k Hardship Withdrawals

401k hardship withdrawals are harder to acquire because you can only request one under certain conditions. Here is a short list of reasons your employer may allow you to take out a 401k hardship withdrawal:

●     medical expenses for you, a spouse, or dependents

●     purchase of, or repairs to, a principal residence

●     payment of college tuition and related costs for you, a spouse, dependents, or children who are no longer dependents

●     impending home foreclosure or eviction

●     funeral expenses

In addition to being in one of the aforementioned situations, there are specific guidelines that a borrower must meet to qualify for a 401k hardship withdrawal:

●     You must demonstrate an immediate and burdensome financial need.

●     The withdrawal amount must be sufficient to satisfy the claimed need.

●     You cannot withdraw more money than you need to resolve the situation.

●     You must have already exhausted all other 401k distribution and loan options prior to requesting a hardship withdrawal.

Conclusion

In short, if you can find another way to acquire the money you need then it is probably a better idea to go that route than to tap into your 401k savings. After all, the reason you started saving under the 401k umbrella was so that you could live comfortably in retirement. However, if it is necessary to take out a 401k loan or hardship withdrawal, you’ll need to opt for the loan first, which in most cases is a better option anyway.

The requisites mentioned in this article are not exhaustive, and many 401k plan administrators have regulations above and beyond those mentioned here. To make the best decision, speak with your plan administrator and a qualified tax professional before requesting a 401k withdrawal of any kind.

If you already left the company with whom you started the 401k, you may have other options available to you. Visit www.401kRollover.com today or call us toll-free at (800) 767-1423 now for free, personalized help with your 401k rollover and we can show you ways to fully flex your financial muscle.