Jade Washaw, financial expert with Ramsey Solutions, joined Cheddar News to discuss when you can withdraw from your 401k plan early.

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When It Makes Sense to Dip Into Your 401k

That persisted inflation and an uncertain economy. A record number of Americans tapping into their 401K savings last year to pay for emergencies. Financial services firms fidelity and vanguard both seen a rise in so called the hardship withdrawals with fidelity savings saw the highest share of withdrawals ever in 2021. While many experts take tapping into your retirement savings should be a last resort in dire situations. There's no other choice. So joining me now is jade wash personal finance expert at Ramsey Solutions, a financial counseling and education firm jade. It's great to have you on the show. And when does it make sense to actually withdraw from your 401k. Hi Kristen, thanks for having me on. Yeah, there are certain hardship times where the government is not gonna ding you with that 10% penalty for taking out the retirement. Definit situations with your tuition. There might be some situation where you're having a funeral or burial costs and of course with eviction and foreclosure. Those are some of the hardships where you know, the government says, Hey, you can take this money out and we're not gonna hit you with that 10% charge. Are there penalties though jade associated withdrawing from your 401k. Early? If you're not able to waive the charge, That's right. If it's not a hardship and you're taking from your 401k before retirement age 51 a half. Yes, you are going to get hit with that 10% penalty, but not only that you have to pay income taxes on the amount that you withdraw and if you happen to bump yourself up into a new tax bracket, well you're responsible for the percentage there as well. Okay, very good to know. Can you tap into your 401K plan in the event that you're laid off or unemployed? I know we kind of talked about these hardships obviously, but let's just kind of flesh it out a little bit, more. You know, when your face, it's tough out there, there's so many things that we can't control and if you do face a job loss, you know, that is an emergency. However, when you, whenever you take debt or tap into your retirement, that just turns an emergency into a crisis. So the only time that we would ever say to tap into your 401K is if you're facing four closure eviction bankruptcy. But other than that, we would say that it's good to have an emergency fund, a fully funded emergency fund of 3 to 6 months. Okay, really good advice there, especially in these days. Absolutely. I know some of these plans do actually let you borrow money from your account balance though. What are some things that people should know about that? Yeah. You know, it's a four oh one K loan, not to be confused with a four oh one K withdrawal that we spoke about earlier and with a 401k loan, it's very similar to any other loan structure that we see where you are charged interest for the loan balance. But here's the thing, this is very dangerous because if something happens and you lose your job, you are still on the hook for that loan. And not only that, you've got to pay it off before the next tax deadline. If you don't, you are on the hook for that money. Now as a 401k withdrawal, which means you are hit with that 10% penalty. You are hit with the income taxes on top of the fact that you've got to repay it, jade. A lot of good insight here. Thank you so much. My final question is any other financial tips for people out there trying to manage kind of still a tenuous situation in this economy and of course their own finances. That's right. Kristen these times are tough. People are facing a real financial pinch. We all are feeling it. And you know, there are some common sense things that you can do get on a budget. Give every dollar an assignment, you know, start to find ways to increase your income. And of course you need savings, a good 3 to 6 month emergency savings. And if you need more resources, you can find them at Ramsey solutions dot com slash retirement. All right, jade washout personal finance expert at Ramsey solutions, jade. Great advice. Thank you