Employee Benefits-IRS Provides Some Thoughts On Considering The Consequences Of 401(k) Plan Hardship Distributions

In Retirement News For Employers, August 20, 2013, the IRS provides some thoughts on the consequences of 401(k) plan hardship distributions. Here is what the IRS said:

Many 401(k) plans allow you to withdraw money before you actually retire for certain events that cause you a financial hardship. For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse’s, your dependents’ or your primary plan beneficiary’s:

• medical expenses,
• funeral expenses, or • tuition and related educational expenses.

However, you should know these consequences before taking a hardship distribution:

• The amount of the hardship distribution will permanently reduce the amount you’ll have in the plan at retirement.
• You must pay income tax on any previously untaxed money you receive as a hardship distribution.
• You may also have to pay an additional 10% tax, unless you are age 59½ or older, or qualify for another exception.
• You may not be able to contribute to the plan for six months after you receive the hardship distribution.

Remember, a 401(k) plan is designed to help you save money for your retirement while you’re working. You should consider the consequences before dipping into your retirement savings.