More Consumers Making Hardship Withdraws From 401(k) Accounts

A recent report reveals that Americans who are seeking debt relief from foreclosure, medical bills and other hefty obligations are turning to their 401(k) accounts for money. According to Fidelity Investments, the number of its customers seeking "hardship withdrawals" rose from 45,000 during the second quarter of last year to 62,000 during the same period this year.

Bank professionals expressed their concern because the 45,000 that withdrew one year ago also took part in a second withdrawal this year, indicating that their financial condition has not improved, despite taking funds from their retirement.

Consumers who take hardship withdrawals must prove immediate financial need to the Internal Revenue Service to qualify. This may include the need to use the funds for an impending foreclosure, medical expense or other significant financial obligation. Even once they prove hardship, consumers under the age of 59 1/2 will still incur a 10 percent early withdrawal tax penalty.

Individuals should explore all of their financial options prior to taking from their retirement fund, including credit counseling and government aid programs. If they choose to take from their retirement, consumers are advised to understand the financial and tax implications.