Dear Carrie: I'm 57 years old and unemployed. I have $250,000 in a 401(k). Can I withdraw some of the money under hardship? --A Reader
Dear Reader: While it sounds like you're experiencing a tough time, your age and the size of your 401(k) mean that you do have some options for getting through it. If you were employed, my first recommendation would be a 401(k) loan. That way you could access some of your assets without paying income taxes and a possible penalty on your distribution. Unfortunately, a 401(k) loan isn't allowed once you leave a company.
As you suggest, a hardship distribution is another possibility, although what's considered a hardship is very specific -- and the cost in taxes and penalties can be formidable. Fortunately, there are other alternatives for someone in your situation.
LOOK INTO SEPARATION OF SERVICE
You don't say when your employment status changed, but if you left or lost your job in the year you turned 55 (or later), you could consider a distribution from your 401(k) under what's called separation of service. This allows you to take an early distribution without paying a penalty, although you will have to pay income taxes on it.
CONSIDER TAKING SUBSTANTIALLY EQUAL PERIODIC PAYMENTS
If you left your company before age 55, you can still set up a schedule of "substantially equal periodic payments" and avoid the 10 percent penalty. Determined by your life expectancy and an interest rate approved by the IRS, withdrawals must be taken for a minimum of 5 years or until you reach age 59 1/2, whichever is longer. So if you started taking them now at 57, you'd have to continue until age 62. After that, you could take unlimited amounts from your 401(k) penalty-free.
THINK ABOUT A ROLLOVER IRA
Another alternative is to roll over your 401(k) into an IRA. This could actually mean more investment choices and lower fees. Rolling over can be a fairly simple, no-cost process, but you must be sure to roll your 401(k) directly from your employer to your IRA. If you take possession of the money, timing rules and possible penalties come into play. And the IRS also allows you to take a distribution from an IRA in substantially equal payments with no penalty at any age.
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