Participating in a 401K Plan has a lot of advantages. Bear in mind though, that 401K Plans are intended to help you monetarily when you reach retirement. Consequently, any withdrawals you may make from your 401K Plan at an age younger than 59 may come with steep penalties including 10% of the amount withdrawn and subjecting this to income tax appropriate for your tax bracket.
There are legal exceptions however that would permit penalty-free withdrawals from 401K Plans. These are typically for situations that would justify what is known as a hardship withdrawal. You are considered to be in financial hardship if you find yourself in urgent need of financing and having no alternative course of getting this. Possible home foreclosure, steep medical bills or college education for yourself or your spouse and children, and other comparable situations may typically qualify you for a hardship withdrawal.
Prior to being granted a 401K withdrawal, you would most likely be asked to find other sources to finance your needs such as applying for a 401K loan. Another potential requirement would be for you to show documents or other materials to prove your financial hardship and inability to get alternative financing for this.
Once you have made the withdrawal, you are required to declare the amount withdrawn as gross income in your income tax report. You and your employer are also disallowed to make any contributions to your 401K Plan for a minimum of six months.
It is highly advisable that you look into other financial options to address your needs so that you do not have to deal with the penalties of making a 401K withdrawal, and losing potential income from it that could come from interests it may make. Your company’s HR department or your 401K company may provide you with the best options, so you are encouraged to seek their advice.