Hardship Retirement Plan Withdrawals

If you are faced with financial problems and are concerning withdrawing money from your retirement plan at work such as your 401k plan be aware of the potential problems that withdrawal might cause.

To begin with review your employer’s plan document to determine if hardship withdrawals will be allowed, and if so, what circumstances experienced by the employee will qualify (for example, unreimbursed medical expenses).
 

To be allowed by the IRS employee’s need must be “immediate and heavy,” which can include:

• Certain medical expenses.

• Purchase of and repairs to a principal residence.

• Avoiding eviction or foreclosure.

• Tuition and education expenses.

Take in consideration the rule also requires the employee to exhaust all other available options, such as borrowing from the account instead of liquidating it. Finally, the employee can usually only get contributions out via a hardship withdrawal, not account earnings.

Hardship distributions from your retirement plan are taxed as ordinary income and is added to your regular taxable income in the year withdrawn. If you happen to be under 59 1/2 then an additional 10 % penalty will be imposed. However there are five instances in which the 10 percent penalty(but not the taxes) can be avoided:

• Total and permanent disability.

• Unreimbursed medical bills exceeding 7.5 percent of adjusted gross income.

• Court-ordered family support payments.

• Permanent loss of job after reaching age 55.

• Payments made via a 72(t) schedule of withdrawals.

Alternative to a hardship withdrawal includes the following

401 k Loan

Roth IRA’s

IRA’s

Life Insurance

Each of the above has its advantages and disadvantages and should be considered before taking a hardship withdrawal. Regardless of which method you choose, money withdrawn is very hard to replace and chances are you will never make up the different even if you take a loan against your 401K plan.

In addition, any monies withdrawn are no longer growing or compounding and will be extremely difficult to replace.

Daniel Iuculano, AAMS CMFC

Accredited Asset Management Specialist

Chartered Mutual Fund Counselor