If you’re weighed down by inflation and you still have money in your 401(k) plan, you might be wondering how you can get it. In this case, the so-called “difficult exit” sounds appropriate. But the IRS has six designations by which you can demonstrate “imminent and serious financial need” to get money out if you’re under 59.5 years old, and inflation isn’t one of them.
When you submit a hardship exit request, the first stop is likely to be your retirement plan custodian’s portal, where you can click A few buttons and tell them what you need. This information will be transmitted to your employer’s human resources department, where it will be assessed by someone or automatically if your program allows for self-certification. At some point, the auditor who is the trustee will look at it and make sure it’s legal, or eventually, the IRS may deny the exemption for the withdrawal, and then you end up with tax issues. This is why requests related to inflation may suffer in the process. Todd Feder, Girard’s vice president and senior retirement planning advisor, recently had to stop ongoing requests through a plan he suggested because it did not meet hardship requirements. “An employee went to the plan sponsor and said inflation was going up, I was having a baby, and I needed money to pay my mortgage. They approved it, but it wasn’t allowed,” Fader said. Instead of denying the request, Fader found a creative solution. “When we found out about the baby, we collected statements about the medical bills, documented that it was for medical reasons, and kept the paperwork for fiduciary documents,” he said. “It wasn’t easy.”
Click other options first
As part of his work at Ascensus, Irace met with many of the Discuss other options they may have before claiming difficulty. “I try to tell people that if you do this, you’re borrowing your future,” he said. But he found that they were often unaware of the rules, and it was frustrating to find that the money they needed was not being received. In Ascensus, they can actually count this discontent. “Our call center has a 96% overall satisfaction rate, and 3% of dissatisfaction is due to people calling to get money, but not being able to get it because the plan doesn’t allow it,” Irace said. With other retirement accounts, the withdrawal process is a bit easier. For example, with a Roth IRA, you can withdraw your contributions at any time as long as your account has been open for five years. With a traditional IRA, you can withdraw before 59 ½ for similar reasons as hardship withdrawals, and avoid the 10% penalty if you certify exemption. You can also withdraw money directly if you pay a 10% penalty and tax. There are easier ways to get money from 401(k)s. Most plans allow for loans, and they’re usually the best option in the sense that you can pay yourself back with interest and there are no IRS penalties or taxes involved. But, “if you’re going through a time of financial stress, that can be hard to do,” says David Stinnett, director of strategic retirement consulting at Vanguard. Additionally, your amount is capped at $50,000 or half the stated value, whichever is greater. And, if you leave your job while the loan is still due, you must immediately repay the loan or pay taxes and penalties on the remainder. You can also make on-the-job withdrawals, which allow you to withdraw and pay taxes and penalties, but note that these are generally restricted to those over the age of 59.5, although some plans allow younger participants withdraw money.
IMPACT ON RETIREMENT PREPARATION
All options for withdrawing money from your retirement account can affect your long-term retirement prospects. “A lot of people think they can take their money out because they can always live on Social Security, but you need something to supplement it,” says Kelly Farnsworth, director of compliance at Ubiquity, a retirement plan administrator. “My advice is always to try and plan for unforeseen events, but not everyone can do that. Beyond that, education is key so you know your options for withdrawing funds and know if you Do that, and you’re going to pay some taxes.” For Irace, the education part mostly boils down to participation. People who are generally engaged and seek information tend to do better. “People who log in once a year—you watch something or take an action—our stats show that their balance is 25% higher than people who never log in,” Irace said. “The engagement factor makes sense.” Got a question about the mechanics of investing, how does it fit into your overall financial plan and what strategies can help you get the most out of your money? You can write me at [email protected].
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