No, you can’t cancel your 401k plan because it can only be terminated early by your employer. While you’re still employed by the company that sponsors your 401k, you may only:
- Take Hardship Distributions
- Take Out a Retirement Loan
Some 401k plans can be rolled over into an IRA even while you’re still employed but you’ll lose the ability to borrow money from your retirement account and you’ll have to wait until you’re 59½ years old before you can take distributions without the 10% tax penalty.
💡 Note: Dipping into your 401k may provide you with an influx of cash but it comes at great costs: taxes, fees, and future investment returns.
How to Make 401k Hardship Withdrawals
Not all 401(k) plans allow hardship withdrawals so be sure to ask your employer if this is an option you can take.
But in general, you may take a hardship distribution if you have an immediate and heavy financial need for the following:
- Medical Expenses
- Funeral Expenses
- Educational Expenses
If your 401k plan has elected to use the Summary Substantiation Method, then you can take a hardship distribution if your immediate and heavy financial need falls under these six categories:
- Medical Care Expenses
- Purchase of Principal Residence (excluding mortgage payments)
- Expenses to Prevent Eviction or Foreclosure of Your Principal Residence
- Expenses to Repair Damage to Your Principal Residence
- Educational Expenses (including room and board expenses for the next 12 months of postsecondary education)
- Funeral Expenses
💡 Note: These expenses can be yours, your spouse’s, your dependents’, or your primary plan beneficiary’s.
What are the Downsides of Taking Hardship Distributions?
The downsides of making hardship withdrawals are the following:
- You’ll need to pay income tax in addition to the 10% early withdrawal penalty.
- You’re permanently reducing the money you’ll receive when you retire.
- You may not be able to contribute to your 401k for 6 months.
Overall, you should exhaust all other options before you dip into your retirement account.
How to Take Out a Retirement Loan
Instead of taking hardship distributions, you can borrow from your 401(k) account balance if your plan allows it. Unlike hardship withdrawals, you can take out a retirement loan as long as the plan allows it (some plans may require your spouse to consent to the loan).
Here are some of the details of a 401k loan:
- The maximum amount you can borrow ranges from $10,000 to $50,000.
- If 50% of your vested account balance is greater than $10,000 and less than 50,000, then you can borrow up to 50% of your vested account balance.
- If 50% of your vested account balance is less than $10,000, then you can borrow up to $10,000.
- If 50% of your vested account balance is greater than $50,000, then you can borrow up to $50,000.
- The loan must be repaid in 5 years (except for loans made to purchase your principal residence).
- Payments must be made in substantially equal payments (including principal and interest) that are paid at least quarterly.
Related article: How to Save Money From Your Salary Every Month
Build Your Credit Score with Your Recurring Payments
If a personal loan isn’t in the cards for you right now, ensure that you can take one out in the future by building your credit with Cushion.
You can steadily build your credit by paying your recurring monthly payments with the Cushion Debit Card. This way, you’ll never have to dip into your retirement savings ever again.
Better yet, we’ll ensure you never pay a late fee again by reminding you when they’re due and by streaming your due dates to your Google Calendar (which updates in real time!).
