Hards🎃hip Withdrawal vs. 401(k) Loan: An Overview

Is it ever okay to take from your 401(k) plan, either as a 401(k) loan or as a 澳洲幸运5官方开奖结果体彩网:hardship withdrawal? After all, your plan is a powerful retirement savings tool. The primary advantage of saving in a 401(k) is the ability to enjoy 澳洲幸运5官方开奖结果体彩网:tax-deferred growth on your investments. When you’re setting aside cash for the long term, a hands-off approach is usually best. Nevertheless, there are some scenarios in which taking money out of your 401(k) can mak🔴e sense.

Hardship Withdrawals

The 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) specifies that hardship withdrawals are allowed only when there’s an immediate and heavy financial need. If your withdrawal qualifies, you can bypass the 10% early withdrawal penalty that you would typically pay if you withdrew the funds and were under age 59 ½. However, the withdrawal is subject to 澳洲幸运5官方开奖结果体彩网:ordinary income tax.

Hardship withdrawals are only allowed in certain situations. For example, if you find yourself in a life-or-death medical situation—say, one requiring emergency surgery—taking a hardship withdrawal could help to cover the gap if your insurance coverage falls short.

Other🦋 situations that may qualify as a hardship withdrawal include: 

• Tuition, related educational fees, and room-and-board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents, or beneficiary.
• Funds that are necessary to prevent the eviction of the employee from their principal residence or 澳洲幸运5官方开奖结果体彩网:foreclosure on the mortgage on that residence.
• 澳洲幸运5官方开奖结果体彩网:Funeral expenses for the employee or the employee’s spouse, children, dependents, or beneficiary.
• Certain expenses to repair damage to the employee’s principal residence.

401(k) Loans

A 401(k) loan is the other option. Under IRS guidelines, you can borrow 50% of your vested account balance or $50,000, whichever is less. A loan, however, has both pros and cons.

A loan is just that: a loan, not a 澳洲幸运5官方开奖结果体彩网:distribution. You’re essentially paying yourself back the money, which means you’re putting it back into your retirement account. That’s a positive. Loans are usually repaid with interest, which can make up somewhat for the earnings you’re losing by not leaving the money in your plan. Another positive: you don't need to undergo a credit check to apply for a 401(k) loan. This may be attractive to you, depending on your 澳洲幸运5官方开奖结果体彩网:credit score.

The downside is that if you leave your job and don't repay the loan within a specified period—to the due date of your federal income tax return, with the option of a six-month extension—it’s treated as a regular distribution. (The deadline was previously a 60-to-90-day window, but the Tax Cuts and Jobs Act changed that.) And, importantly: in this case, if you don't repay the loan by the deadline, the income tax and 10% early withdrawal penalty would apply.

Consolidating Debt

You could use a 401(k) loan to 澳洲幸运5官方开奖结果体彩网:consolidate high-interest debt if your credit doesn’t qualify you for a low rate on a personal loan or 澳洲幸运5官方开奖结果体彩网:debt consolidation loan. Comparing how much you’re paying in interest on your 澳洲幸运5官方开奖结果体彩网:credit cards or other debt to the interest rate your 401(k) plan administrator char🌠ges can help you decide which is the better deal.

Buying a Home

Your 401(k) could also be a source of cash when you’re planning to buy a home. You could use the money to cover 澳洲幸运5官方开奖结果体彩网:closing costs or hold it in your 澳洲幸运5官方开奖结果体彩网:down paymentᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ savings account for a few months before buying, so the funds are seasoned.

Generally, a 401(k) loan must be repaid within five years, and you must make at least quarterly payments, but the IRS allows provisions for plan administrators to extend the repayment period longer for homebuyers.

Making an Investment

Using a 401(k) loan to invest may sound like a gamble, but it could be appropriate if certain conditions exist. Let’s say, for example, that you want to 澳洲幸运5官方开奖结果体彩网:purchase a home as an investﷺment property. You plan to renovate the home and 澳洲幸运5官方开奖结果体彩网:flip it for a profit but need capital to make the purchase. If you’re confident that the project will yield a big enough return, you could use a loan from your 401(k) to buy it or pay for renovations, then use the proceed𒅌s from the sale to pay💎 back what you borrowed.

When You Have a Comfortable Retirement Cushion

If you’ve been saving steadily over the years and choosing solid investments, you may be ahead of schedule when it comes to meeting your retirement goal. If that’s the case, and your job is stable, taking a loan from you♈r 401(k) may not be too 🍬detrimental to your retirement outlook. You could use the money for the purchase of a vacation home, for example—or, if you have a child in college, as a less expensive alternative to 澳洲幸运5官方开奖结果体彩网:student loans.

The Bottom Line

Ideally, your 401(k) plan should have a steady stream of money going in rather than out. If you do decide to take a loan from your plan—or a financial need makes a hardship withdrawal a necessity—be sure you understand the potential tax consequences of doing so. If you are unsure of the consequences, you may want to consider seeking the advice of a qualified financial planner before deciding to take a hardship withdrawal or 澳洲幸运5官方开奖结果体彩网:a loan from your 401(k).

Also, consider how taking that money out may affect the growth of your nest egg over the long term. Taking out a large withdrawal or loan may mean you’💫ll have to play catch up to reach your retirement savings goal.