When people save for retirement, they are aiming at living expenses, recreation and perhaps a little provision to sock away for the children. Ideally, these goals get paid for, and an enjoyable retirement is had by all. However, in the real world, things happen, unforeseen death among them.
Attending to such misfortunes can cost significant expense to those on a fixed income, but you are not without resources. Some 401(k) retirement funds, for example, allow for withdrawal under certain, limited occasions of adversity. Funeral, burial and/or cremation expenses might be eligible for payment from these savings.
How Does a 401(k) Work?
As traditional pensions grew too expensive for private employers, they turned to the 401(k) to help fund employee retirements. When a working associate enrolls in the 401(k) program, that staffer agrees to have a percentage of regular compensation placed in an investment account. In response, the employer can choose to match some or all of that contribution. Usually, the worker has a choice of investment options such as stocks, bonds and mutual funds.
These investments gain in value over the course of employment, so the retirement nest egg is determined by how much you put into the fund and how many years you remain with the company. Like other retirement instruments, there are usually penalties for withdrawing monies before you retire, and most financial advisers urge clients not to place all their spare earnings into the 401(k). The IRS places limits on the total allowable contributions too.
Are There Different Types of 401(k)s?
Like its individual retirement arrangement (IRA) counterpart, the 401(k) account can be either traditional or Roth. In the traditional model, contributions are tax-deductible, while distributions are subject to taxation. The Roth version is the opposite: the dollars that go into the account are taxed, and those withdrawn once retirement kicks in are not. According to the IRS, one must start taking distributions when they turn 72.
What Are the Criteria for Distribution?
To escape penalties when withdrawing funds from a 401(k), the account holder must satisfy specific conditions. For one thing, you must reach an age of 59.5 years for this to happen. In the case of a Roth account, the owner must also have held the account for a five-year minimum.
Alternatively, permanent disability or an inherited 401(k) will also shield you from the 10 percent early withdrawal penalty. Another scenario is when a reserve or National Guard service person is deployed to active duty.
401(k) Hardship Withdrawals
Many plans make provision for those stresses and difficulties that arise without anticipation. These 401(k) hardship withdrawals are allowed for immediate and heavy financial need. Some examples of these circumstances include:
- Emergency medical costs
- Costs related to a home purchase transaction
- Impending loss of residence due to eviction or foreclosure
- Fixing a house damaged by storms or another weather event
- College tuition payments
Also among the acceptable scenarios are costs related to funerals and burials. Contact your plan administrator for the particulars. Keep in mind that you'll need to pay income taxes on the distribution (if applicable) even if the 10 percent early withdrawal penalty gets waived for hardship.
Borrowing Against the 401(k) for a Funeral Expense Loan
Rather than taking a distribution from the account, according to the IRS, owners can borrow money using the accrued funds as collateral. However, employers decide whether this is allowed, and you'll pay need to pay interest to yourself in the process.
It's important to know the consequences of not paying back the loan. In that case, those borrowed monies will be treated as an early withdrawal that's subject to both applicable taxes and penalties. In any event, borrowing and paying back the funds does not reduce the value of the account nor does it incur any disciplinary forfeiture.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.