There are times in our lives that we need a significant amount of money, but we may not have the means to pay it back, so your best option may be a hardship withdrawal from your 401k.
Historically, the rules have been restricted, and at times, do not make sense.
The Budget Act was passed in early 2018, and will go into effect on January 2019. The new legislation relaxes the rules related to hardship withdrawals.
You’ll want to know these updates before 2019 rolls in:
HARDSHIP WITHDRAWAL OLD WAY:
It used to be that you had to exhaust all possibilities of taking a loan out on your 401k before you could receive a hardship withdrawal. Under the old rules, you could only withdraw the amounts you had withheld from your paycheck, also known as your salary-deferral contributions.
HARDSHIP WITHDRAWAL 2019 UPDATE:
The new rules eliminate the requirement to take out loans before being eligible for a hardship withdrawal. Now you may be able to withdraw your employer’s contributions PLUS investment earnings PLUS your salary-deferral contributions. In addition, you won’t have to stop contributing – so you’ll lose less and still be eligible for employer contribution matching.
TOP REASONS YOU MAY NEED A HARDSHIP WITHDRAWAL:
- certain medical expenses
- home-buying expenses for a principal residence
- up to 12 months’ worth of tuition and fees
- expenses to prevent being foreclosed on or evicted
- burial or funeral expenses
- certain expenses for a principal residence to repair casualty losses to a damaged home (such as losses from fires, earthquakes or floods)
Hardship withdrawals might be more relaxed, but making the choice to use the funds should not be taken lightly. Hardship withdrawals are a permanent loss to you retirement account, which means that you not only lose the money you take, but also the years of compound investment returns.
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If you don’t have any plans for retirement or have questions about compliance, send us an email or call us at 937.308.0758.
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