How to Use a 401(k) Plan to Cover Medical Expenses
For many Americans, medical expenses can be a significant financial burden. Fortunately, 401(k) plans offer a way to pay for medical expenses without incurring taxes or penalties. In this article, we'll discuss how to use a 401(k) plan to cover medical expenses.
The most common way to use a 401(k) plan to pay for medical expenses is through a loan. With a 401(k) loan, you can borrow up to 50% of your vested balance, up to a maximum of $50,000. The loan must be repaid within five years, and you must make regular payments. The interest rate on a 401(k) loan is usually lower than the rate on a personal loan.
Another way to use a 401(k) plan to pay for medical expenses is through a hardship withdrawal. With a hardship withdrawal, you can withdraw up to the amount of your medical expenses, up to a maximum of $10,000. However, this option is only available if you can demonstrate that you have an immediate and heavy financial need. Additionally, you will be subject to taxes and a 10% penalty on the amount withdrawn.
Finally, you can use a 401(k) plan to pay for medical expenses through a Roth conversion. With a Roth conversion, you can convert some or all of your 401(k) funds into a Roth IRA. This allows you to withdraw your funds tax-free and penalty-free for medical expenses. However, you will still be subject to income taxes on the amount converted.
Using a 401(k) plan to pay for medical expenses can be a smart financial move. It allows you to access funds without incurring taxes or penalties, and it can help you avoid taking on additional debt. However, it is important to remember that a 401(k) loan or hardship withdrawal can have a significant impact on your retirement savings. Before taking this route, be sure to consider all of your options and speak with a financial advisor.