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.