Hardship Withdrawals: What to Consider
Depending on the type of retirement plan you have, you may be able to take distributions during difficult or otherwise pressed financial times. These withdrawals, known as “hardship distributions”, come from your elective deferral account made because of, according to the IRS, “an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need”. Hardship withdrawals can only be taken from an employer sponsored retirement plan. Here is a quick reference guide to hardship withdrawals to help you decide whether or not your circumstance qualifies.
Immediate and heavy financial need defined
A “heavy financial need” is based solely on your plans specifications, all important facts and your unique circumstances. The employer will determine if your request falls within those parameters. Generally speaking, luxury or discretionary items (like a recreational-only vehicle or a big screen T.V) are not considered a “heavy financial need”. They’re just that - luxury items that go beyond the scope of the basic necessities of life.
Additionally, your financial need may be “immediate and heavy” even if you incurred it voluntarily. It doesn’t have to be a surprise expense to necessarily qualify.
What qualifies as “necessary”
A hardship withdrawal is considered to be necessary by default if it meets all of the following parameters:
You have obtained all other currently available distributions, except for hardship ones, as well as any other non-taxable loans (including all plans by your employer).
You are not permitted to make elective deferrals to your plan for at least 6 more months after you receive the hardship withdrawal.
The withdrawal isn’t larger than what you need it for, including the amount necessary to pay taxes resulting from it.
You couldn't reasonably get the funds from any other source. That said, you are not required to use an alternative source if doing so would increase your need.
Examples of permitted withdrawal reasons
Depending on your plan, you may be able to take a hardship distribution for the following reasons:
Specific medical expenses.
Related and applicable expenses for buying your primary home
Up to 12 months of tuition/fees
Funds to help prevent you from being foreclosed on or evicted.
Burial or funeral expenses.
The need to repair casualty losses to your primary home (storms, floods, earthquakes, fires etc).
You can get a “penalty-free” withdrawal only under very specific circumstances (like a financially-devastating medical bill or a disability).
What else to expect
If you are younger than 59½, you'll be charged at 10% penalty on the amount you withdraw. Additionally, the amount you withdraw does not need to be repaid into your plan, but you must pay taxes on the amount of the withdrawal. Unless your plan consists of Roth contributions, hardship withdrawals are subject to income taxes, and you are not permitted to “roll it over” to another plan or an IRA.
Did COVID-19 change anything?
Yes, it did. Signed into law on March 27, 2020, the coronavirus emergency stimulus bill allows those who have been financially affected by the virus’ impact to take a hardship withdrawal of up to $100,000 without the 10% penalty for those under 59.5 years old. Additionally, you’d have up to 3 years to pay the taxes owed on the amount, verses owing it in the current year.
How we can help
While we understand emergencies happen, your retirement account should ideally be left for just that - your retirement. Even though you don’t have to repay the amount you take out, you will lose valuable time in your contributions due to the 6 month delay before you pick it up again. We can help you plan for the unknown and make sure you have a comfortable emergency account so you do not need to take a hardship withdrawal.
Or, if you’re a business owner and you didn’t make hardship distributions according to your plan document/or your plan doesn’t have any special language allowing them, we can help correct it.
Give us a call today.
