Times are a lot tougher than they were 2 years ago. It is evident in the media. We can read almost daily about the increasing unemployment rate, companies going out of business and the growing national deficit. We see proof every day as we drive through our neighborhoods and see the increasing number of foreclosures. Most people feel the pressures of mortgage payments, rent, car payments, student loans, credit card debt and normally living expenses. Many people may have been counting on the normal annual salary adjustment, annual raises, or bonuses to make ends meet and to cover expenses. Others may be just making ends meet. Almost everyone lives paycheck to paycheck. What happens when something unexpected happens? Where do you pull money from when the car breaks down or someone gets sick and needs medical treatment? Where can you turn? Many people contribute to their 401k account and may have a substantial amount available. A 401k early withdrawal may be source of capital to help during hard times.

401k plans are employer-sponsored retirement plans where an employer contributes a percentage of the employee’s compensation to a retirement savings account. This contribution and its gains are usually not taxed until withdrawn from the account. The intent is for the invested contributions to grow over time and provide an income stream after the age of 59 ½ and when people retire from full-time employment. Distributions after the age of 59 ½ are taxed as part of your normal income tax.

It is possible to get a 401k early withdrawal before the age of 59 ½. A 401k early withdrawal requires that you request it from your 401k administrator and that you request is limited to a number of hardship situations. Situations include medical expenses, home purchases, college tuition, mortgage payments to prevent foreclosure, funeral expenses, and certain home repair expenses. There is a penalty for a 401k early withdrawal. On top of the normal income tax on the distribution, the 410k early withdrawal is assessed a 10 percent penalty for withdrawing money before the age of 59 ½ . There are situations that are exceptions to the penalty. These situations include becoming totally disabled, medical expenses that exceed 7.5 of adjust gross income, court-ordered alimony or child-support, being laid off at the age of 55, and setting up a payment schedule to withdraw money in equal distributions over the course of your life expectancy after being laid off. Taxes and the penalty on the withdrawal can make a serious dent in the withdrawal amount. For example, if you take a $10,000 hardship withdrawal and you fall in the 28 percent tax bracket, you would receive $6,300 after paying $2,800 in taxes and $1,000 to cover the early withdrawal penalty.

In times of distress, a 401k savings account can be the means to alleviate the burdens of financial stress. It can provide the way to overcome financial obstacles, reach short term goals, and give peace of mind in a turbulent economic environment.