While accessing the funds in 401(k) accounts isn't impossible, it's highly advised against – and for good reason. According to Forbes, tapping into that money should only occur if there's an "immediate and heavy financial need." In other words, it should be considered as a final resort, not an emergency savings account.
And the reasons aren't that complicated. For one, penalties and taxes generally apply, even for hardship distributions. For another, that money has been set aside for a specific purpose; early access disturbs the financial security of you and your loved ones' future.
When Tapping Should Be Considered
However, there are always exceptions.
A to 401(k)s is not typically prohibited; major, unplanned financial life events happen, and common enough to where exceptions can be made.
For instance, penalties can be dismissed if the early withdrawal is specifically for medical care that exceeds 7.5 percent of your adjusted gross income (if the expenses are paid same year).
Similarly, hardship distributions can be made if there imminent foreclosure proceedings (on the primary residence). Also home related, necessary home repair caused by acts of God (qualifying damages by Internal Revenue Code section 165) can be approved as well.
One other area of life that can incur high costs unexpectedly and unavoidably are final arrangements. Hardship withdrawals for necessary funeral expenses (burial, memorials; not flowers or receptions) can be approved.
While other instances might receive approval (secondary education expenses, first home buying), and it is always recommended to ask about penalty/tax exemptions, these three instances are the most justifiable for accessing 401(k) savings.
Why Tapping Is Frowned Upon
As with all things financial, particularly regarding later stages of life, one of the most difficult aspects of maintaining financial stability is understanding the basics. Without knowing how particular retirement accounts work, naïve misuse can be perilous for years to come. Acknowledge that retirement financing is different from financing for other areas of life or demographics and accept the implications and personal responsibility. Invest in the financial security of your future and the future of your loved ones. Talk with a financial advisor today.
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