We always cringe when employees call us to make early (before retirement) withdraws from their retirement accounts. We cringe because we want the very best for them and we know that these early withdrawals are going to decrease their ending balance when retirement actually comes around. Not just because of the taxes and potential penalties, but because those funds will miss out on the opportunity to grow and compound over time (the opportunity cost).
We acknowledge that these funds belong to the employee and are there for their benefit (and that of their families). As such, if the employee has a pressing need, especially one that will avoid an impending financial crisis, then the early withdrawal might be justified and possibly even advisable.
However, most retirement plans do not allow for early withdrawals and the few that do only allow for Hardship Withdrawals (generally medical expenses, tuition payments, and certain expenses related to one’s residence). Hardship withdrawals used to be limited to those monies deposited by the employee, but not the growth on that money. Also, there was a requirement that employees exhaust other options, such as a 401(k) loan, before tapping into the Hardship Withdrawal. Lastly, employees that took a Hardship were prohibited from contributing to their retirement plan for 6 months (down from 12 months).
However, all this is changing effective January 1, 2019, thanks to The Bipartisan Budget Act of 2018, which modifies Hardship Withdrawal provisions within the law. The new regulation brings about three significant changes:
- Retirement Plan participants are now allowed to access Hardship Withdrawals without having to first take a 401(k) loan ahead of the Hardship. This is because, in some cases, taking a loan can actually make things worse for the employee and their family.
- Hardship Withdrawals can now come from the money the employee has deposited PLUS the growth on that money. And, in some cases, employees will even be allowed to access monies contributed by their employer (plus the growth on those funds).
- Lastly, employees that take Hardship Withdrawals will NOT be prevented from contributing to their retirement accounts for any period of time.
For more in-depth information on the changes and details of the regulation, read this article provided by Investopedia.
