Withdrawing money from a Fidelity 401(k), before you reach retirement age, is not as simple as putting the money in your bank account or pocket. Federal law prohibits early 401(k) withdrawals except in the case of hardship. Even if hardship circumstances apply, you still may have to pay a penalty on the amount you withdraw in addition to paying taxes on it.
Federal law allows you to begin withdrawing money from your Fidelity 401(k) starting at age 59=1/2. Before then, you cannot withdraw 401(k) funds except under hardship circumstances.
A Fidelity 401(k) plan may allow you to access the money in your account if you fulfill the conditions of a hardship withdrawal. You generally meet these conditions if you need the withdrawal to satisfy an immediate and severe financial need, and if the amount of your withdrawal does not exceed the amount of the financial need. As a condition of an early withdrawal, you may not be able to make contributions to the 401(k) plan for at least six months. While these are general guidelines, Fidelity notes that the decision of whether to allow you to make an early withdrawal is up to your employer. Smaller companies may not allow early withdrawals because of administrative costs.
Using the Funds
Once you have established a case for hardship, you also must verify how you will use your Fidelity 401(k) funds. You can use early withdrawal funds for one of several specific reasons: To buy a primary home or avoid eviction from--or foreclosure on--your primary residence; to pay college tuition and other fees for yourself, your spouse or your dependents; to pay for medical expenses that are not reimbursed for yourself or an immediate family member; to pay for certain repairs to your primary home; and for funeral expenses.
Unless your plan's prospectus states otherwise, you should not expect to have access to the entire balance in your Fidelity 401(k). Under hardship circumstances, you cannot withdraw more than the sum of your elective contributions to the plan. You cannot withdraw earnings, such as mutual fund returns. Some employer-matching funds may be off limits as well.
Taxes and Penalties
The federal and state governments will count your Fidelity 401(k) withdrawal as taxable income. Furthermore, with a few exceptions, you will owe a 10 percent penalty on any withdrawal you make before age 59-1/2. If you withdraw $10,000, you will pay $1,000 up front as the penalty and then owe taxes on the remaining $9,000.
Avoiding the Penalty
Other hardship circumstances, which do not hinge on financial issues, may allow you to avoid paying the 10 percent penalty. These circumstances include: a total and permanent disability, medical debts that exceed 7.5 percent of your income, a court order to pay 401(k) funds as alimony or child support, and losing your job the year you turn 55 or older. You will still owe taxes on funds you withdraw early for these reasons.