One of the methods you can use to get around this is to take out a hardship withdraw. If you are in a very bad situation you may be able to take money out without this penalty. For example of you become disabled and are nota ble to work. During a situation like that you may be allowed to take out some money without the added penalty.

You may also be able to use the money for personal growth, certain senerios may also allow an investor to take money out early. One such example would be if you are buying your first home and need some extra money to get into it. After all personal growth can help you a lot more then spare money in your account.

If you do not qualify to take money out early there is still another option, you may take out a loan. An employee can choose to take out a loan from their own account and would not have to pay any taxes or penalties on it because it is not income.

However the 401k loan rules do make you pay back the loan with interest. In addition some401k plansdon’t let an investor deposit more money to their account until the loan is paid back. If an employee has their loan out for too long it can really be devestating to their 401k.
Many times it is simply better to take out a regular loan then a 401k loan for that reason.

Getting a 401k withdraw is a worse option then simply taking out a withdraw and paying all the taxes and penalties. This is why it is normally a bad idea to take out a loan just to buy something new, but it can help if it is your last resort. And as always talk to a financial advisor for more information.

401k Hardship Withdrawal Rules

401k hardship withdrawals are allowed only under very specific circumstances, and your and the IRS’s definition of “hardship” may be very different. There are five overriding 401k hardship withdrawal rules:

1. The withdrawal is due to an immediate and severe financial need – You can’t take a hardship withdrawal in anticipation of some emergency 9 months down the line. Qualifying needs will be discussed below.
2. The withdrawal must be a last resort – You must have no other funds available to fulfill the need. For example, if you have $10,000 sitting in a bank somewhere, the hardship withdrawal will be disallowed. It must truly be your last resort.
3. You must only withdrawal what you need – If an emergency medical procedure costs $2,000, for example, you are only allowed to withdraw $2,000. Any amount over that will be subject to penalty.
4. You must have exhausted all taxable loan options – If your plan administrator allows borrowing against your 401k (which is bad idea), for example, you must have exhausted that line of credit before being eligible for a hardship withdrawal.
5. You can’t contribute to your 401k for 6 months after the hardship withdrawal – I suppose Uncle Sam believes if you can afford to start contributing again so soon, you didn’t really need the hardship withdrawal to begin with.

Qualifying Hardship Withdrawal Expenses

Some examples of expenses qualifying for a hardship withdrawal, assuming the conditions above are met, include…

• Non-reimbursable medical expenses for you or your immediate family (as well as your dependents)
• Purchase of a home for first-time home buyers (IRA’s have much laxer rules for this)
• Higher education costs (consider opening an education IRA instead)
• Money to pay your mortgage in an attempt to avoid foreclosure (you might consider a short sale instead)
• Home repair costs
• Funeral costs

Uncle Sam goes out of his way to make taking a hardship withdrawal as difficult as possible, and for good reason. Practically any other option will be better in the end. Still, it’s comforting to know the money is there in times of desperation.