Many financial planners and so called experts would argue that you should never touch your 401(k) save for an emergency. If you are knocking on bankruptcy’s door, this is an emergency. The money that you are contributing to your 401(k) is not going to do you any good if you end up filing for bankruptcy. If you have those funds available, and it means avoiding bankruptcy, its time to activate that safety net.
Most 401(k) companies offer hardship withdrawals to its participants who have fallen on hard times. In some cases you may have to provide them a written reason for your withdrawal. You have to be able to demonstrate an immediate and heavy financial need. Your withdrawal may be subject to state and local taxes, as well as the 10% early withdrawal penalty if you are under age 59 ½. As with anything else concerning taxes, consult your tax advisor as to how this will affect you. If you find that relying on your 401(k) is your only alternative, start the conversations early with your investment company. These companies want to see you get back on your feet, and they will do everything that they can to help you. However, they may not be able to help you as much if you do not give them sufficient time to put a game plan together for you.
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