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Chapter 18. Cashing In or Out of Your 401(k) > Just the Facts, Ma'am - Pg. 176

Cashing In or Out of Your 401(k) 176 What's a Hardship? We face lots of hardships in life, some as trivial as having a long commute, and others that threaten our very well-being. The powers that be in Washington have come up with their own set of hardship rules. They decided that something needed to threaten your well-being before it gets their attention. Before we go any further, let's set a few things straight. It is indeed your money that you are trying to access. But remember, you promised to leave your money in the plan until you retired or reached age 59½. Now when you, the taxpayer, want to break that promise, the IRS doesn't like it. Sort of reminds you of the movie The Godfather, where you didn't want to mess with the Mafia. Same concept here. If you do qualify for a hardship withdrawal, it usually comes with strings attached. You will be liable for taxes, and if you're not 59½ you'll owe a 10 percent penalty as well. Now, if you are in the 28 percent federal tax bracket and are liable for state taxes, and you are under age 59½, you may owe over 40 percent of your withdrawal in taxes and penalties. Yuck! Check this out, too. Not all plans have provisions for hardship withdrawals. Remember that summary plan description (SPD), back in Chapter 2, "The Rules: Understanding Your 401(k)," that we rec- ommended you get a copy of? Well, go get it. The SPD, or your benefits department, should be able to tell you if your plan allows for hardship withdrawals and how exactly they decide what a hardship is. Why wouldn't your employer have put a hardship provision in the plan? For starters, it's a pain. There's lots of paperwork, and paperwork costs money. A hardship withdrawal provision can put an employer in the position of judging what constitutes a hardship. And as for you, the employee, a hardship withdrawal might mean you could quickly empty out the pot that's supposed to be waiting for you at the end of the rainbow.