How to Use Your 401(k) to Pay Bills
- 1). Contact your 401(k) plan administrator to determine if the plan permits hardship withdrawals, loans or both. If your plan permits hardship withdrawals, check to see if your bills qualify you for a hardship withdrawal. If your plan permits neither, you cannot use your 401(k) plan to pay bills until you leave the job or become permanently disabled.
- 2). Request a loan from your 401(k) plan if you will be able to repay the amount, with interest, over the next five years. Loans can be requested by filling out a loan request form or, for some 401(k) plans, over the phone. You can use the loan proceeds for any bills you want to pay. As long as you repay the loan, there are no tax consequences for taking a loan.
- 3). Request a hardship distribution from your 401(k) plan if your plan does not offer loans, or if you do not think you will be able to repay the loan. When you take a hardship distribution, you must report the distribution on your taxes and, if you are not at least 59 1/2 years old, pay a 10 percent early withdrawal penalty.
- 4). Report the amount of your hardship distribution on as a taxable pension and annuity distribution on line 16b of your form 1040 tax return. This amount will be added to your taxable income for the year.
- 5). Multiply your 401(k) plan hardship distribution amount by 10 percent to calculate your early withdrawal penalty. Report this penalty on line 58 of your form 1040 tax return. For example, if your hardship distribution equals $4,000, you would multiply $4,000 by 0.1 to find your penalty, which would be $400.
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