Is it a good ideal to withdraw 1/2 of my 401k to pay bills which are way overdue?

Question

I notice that I get charged 10% when I do the mock withdraw. Is that the 10% for the IRS or am I still paying that at the end of the year

Answer 1

I am a financial advisor. If you are younger than 60 1/2 or older then 70 1/2 do not touch your 401 k. e-mail me for details if you want some help. its free

Answer 2

You won't be able to do it if you're still employed by the company. Unless the company allows you to set up a loan you can't just arbitrarily pull out money from a 401k. Here's the options:

1. you can take out a loan against your 401k. If the company allows it you'll be able to borrow 1/2 of your "vested" balance. Typically you can set yourself up to pay back the loan over a maximum of 5 years. You can set it up for less than that, but 5 years is usually the maximum.

Positive: If you do this method you won't be hit by penalties and you won't have to list the money on your taxes.

Negative: The loan payments are after-tax payments, whereas contributions are pre-tax. AND when you officially close the account and take the money you'll pay tax a second time.

2. Hardship Withdrawls. This is where you take a portion of the amount in the 401k to use for a hardship. The hardship reasons are very specific. You can find them on the irs.gov website. Under this program you take money out and you DON'T pay it back. So you have to list it on your taxes and pay a 10% penalty (if you are under 59 1/2). If you're over 59 1/2 then you only pay taxes on what you draw out.

Positives: There really aren't too many with a hardship. Most companies also suspend contributions for 6 months after a hardship too.

Negavies: Taxes, 10% penalty, having to submit proof of the need, contribution suspension.

Ultimately it's your choice, but I'd review the hardship rules before going forward. If you are just paying off a car note or catching up on credit cards or utilities then a hardship withdrawal doesn't apply and you'll have to do a loan if you can.

Good luck to you!

Answer 3

i am sure there is a reason why you are behind in paying your bills. still, the fact is that you may want to wait on withdrawing from your 401k. you may want to look at other positive alternatives that will help you in paying you bills without losing you own money you have put away. check out u1stfinancial.com and email me your response. you don't have to lose when you can still win.

Answer 4

This is NOT a good idea!  If there is any other way you can pay these bills, exhaust those options first.  You will be hit with a tax penalty for early withdrawl, plus loose out on any growth from those investments in the future.  Plus, if your 401k is invested in the stock market...even mutual funds...they probably are not doing so well right now, so you may stand to loose even more money by selling them when the market is so low.

Good luck!

Answer 5

I asked my Financial advisor this and he said it's not a good idea.  Unless you are willing to get hit by the IRS.  But if you are able to put the money back within 60 days then you won't get hit by fees.

Answer 6

No, it is not.  You will pay a 10% penalty PLUS income tax on the gross withdrawal.  In some cases, you can get a hardship loan from your 401(k).  See your plan administrator.

Answer 7

the better way is to borrow against the 401k to many penalties for just taking it out

Answer 8

Okay here goes. If you withdraw any money from your 401k, you have a small time frame to put it back, but you will pay interest on it. If you are unable to replace it and tax season comes, you will pay tax on whatever the amount is you took out. Say you make 30,000 a year and you take out 5,000. You are unale to return the 5,000 to your account. Tax season comes and you are paying taxes on 35,000. To be safe, because most people cannot put this money back (if you cant make it on thebills now how can you put it back) figure out how much you need to pay down the bills. Stop excess bills once paid off (credit cards, cable netflix etc) say you need 2,000 find out the table income on that 2,000 (make believe it's 300) take out 2,300. Put three hundred away in an account that you canot use only for taxes then when tax season comes you have your payment ready.