Hello Amaracotta,
Hope you're doing well!
Not all plans 401k plans allow for hardship withdrawals. That's up to your employer's discretion. However, even if your 401k plan does allow for hardship withdrawals, credit card debt usually doesn't qualify as a reason to make the withdrawal under hardship rules. The IRS outlines specific reasons you can make a hardship withdrawal:
- Paying for certain medical expenses
- Costs related to buying a home as your primary residence
- Tuition, related educational fees, and education expenses
- To cover payments necessary to prevent eviction or foreclosure on your primary residence
- Burial and funeral expenses
- Expenses related to repairing damage on your home, including following a natural disaster
- Birth and adoption costs (up to $5,000)
So, in most cases, you can’t use a 401k hardship withdrawal just because you want to pay off your credit card balances. In this case, you’d be required to take out a 401k loan.
What is a 401k loan?
401k loans have specific terms and conditions as outlined by the IRS.[2]
- They always have a term of 5 years
- Payments must be made at least quarterly
- The maximum loan amount is 50 percent of your vested account balance OR $50,000, whichever is less
- The loan will have an interest rate, so you will need to repay the money you took out plus interest
- If you leave your job with the company that you have your 401k through, they may require you to pay the full outstanding balance
In general, the money you take out of your 401k is tax exempt. This includes money taken out through a 401k loan. However, if you leave the company, then the money from the loan would be considered as a distribution from the IRS. In this case, you’d also face an immediate tax penalty .
So in your situation, the money you take out of that 401(k) will be taxed as well as you will face a 10% penalty on the amount of distribution.
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