If you are over the age of 59 1/2, you can roll the 401K into a IRA tax free, and then from there dip into it too, but with the usual tax ramifications, but not the 10% penalty.
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You can take out a loan from your 401k.
for financial hardship withdrawal, do not do it the same year you receive a salary or severance, do it in the year when you have no or minimal income. You would pay no taxes if the amount you withdraw is within your family's standard deduction and total personal exemptions:
deduction of $12,600 for joint filing, and
personal exemptions of $4,000 each member
so for a family of 4 you could withdraw (12,600 + 4*4000) = 28,600 without paying any taxes
Tax Pain
What many 401k participants, desperate for money, may forget is the cost of taking a financial hardship withdrawal. A $10,000 withdrawal does not equal $10,000 in your pocket.
If you are under 59 1/2, you will lose 35 percent to 45 percent of the withdrawal in taxes and penalties. You need to think about that.
For example: suppose you fall in the 28 percent tax bracket.
If you take a $10,000 hardship withdrawal to pay for your child's college tuition, you will owe $2,800 in federal income taxes and an additional $1,000 to cover the early withdrawal penalty. You'll be left with $6,300, or even less if you also owe state and local income tax.
Hardship Withdrawals Give Access to Your 401k Savings, but at a Cost
If you're in a financial pinch, you might be able to tap your 401k for a bailout -- but it could really cost you.
You're not alone in wondering if you should tap your retirement savings. With an uncertain economy and average consumers debt building up, many people are thinking about the money in their 401k plans.
It is safe to say that hardship withdrawal information is one of the most sought after items on this website. And that has some financial and retirement industry experts worried. A withdrawal taken in haste today could have a big impact on your golden years.
Hardship Basics
A hardship withdrawal is not like a plan loan. The withdrawal may be difficult to get, and costly if you receive it. Remember, your 401k is meant to provide retirement income. It should be a last-resort source of cash for expenses before then.
Knowing that workers would resist putting aside money for decades with no chance to access it, Congress made provisions in the 401k rules to allow plan withdrawals in a limited number of hardship situations. These include:
Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee's principal residence.
Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
For funeral expenses.
Certain expenses for the repair of damage to the employee's principal residence
But to discourage these early hardship withdrawals, in most all cases the IRS imposes a hefty financial penalty including a 10 percent early withdrawal penalty if you are younger than 59 1/2.
You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:
You become totally disabled.
You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
You are required by court order to give the money to your divorced spouse, a child, or a dependent.
You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
You are separated from service and you have set-up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
Employers are not required to offer any type of hardship withdrawal, so you should check with your employer to see if it is available to you.