With so many people struggling in this bad economy, many are desperate to get money from any source available. Prematurely withdrawing funds from retirement plans before retirement is generally not a good idea as this can have a huge impact on the amount of retirement assets available at retirement. Still many must use the hardship provision just to survive. Some retirement plans may (but are not required to) allow participants to receive hardship distributions. The following sheds light on the hardship withdraw option:
A hardship distribution from a participant’s elective deferrals account can only be made if the distribution meets the following two tests:
Hardship distributions can only be made from accumulated elective deferrals, not from earnings on elective deferrals.
You must contact the plan sponsor or plan administer to determine if the plan allows hardship distributions and request to see a copy of the plan document to know the particular hardship provisions of your plan as drafted by the plan sponsor.
Under IRS rules, a distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if all of the following requirements are satisfied:
In addition, the IRS rules provide the following “safe harbors” for determining if a hardship distribution is on account of an immediate and heavy financial need:
Generally, employees who take a hardship distribution cannot repay it back to the plan and in most cases are not permitted to contribute to the plan for six months after the withdrawal. A review of the provisions of the plan should be made to know the exact provisions of your particular hardship withdrawal features.
Hardship withdrawals are subject to income taxes and a 10% additional tax on early distributions.
If the plan allows for plan loans, this may be a viable alternative to a hardship distribution. This may be preferable if the participant wants to pay back the amount withdrawn from the plan.
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Paul Voss, posted May 19, 2011
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