Beth Pinsker: Inflation isn't a reason for difficult withdrawals, but you can get money out of retirement if you follow these rules

You must meet one of the criteria — medical expenses, funeral expenses, first home purchase, upcoming tuition payments, disaster home repairs, or prevent eviction — and be able to document your need. You can usually withdraw up to the contribution amount and pay income tax on it, but you can avoid the additional 10% penalty for early withdrawals. You no longer need to exhaust all other options first, such as loans, as long as you can demonstrate that you have no other way of obtaining the funds you need. Hardship withdrawals are not like 401(k) loans, where you typically take out $5,000 no questions asked and then you pay yourself back over time. For medical and funeral expenses, you will need to present a receipt for the total amount. You must present the bill for expenses related to the purchase of your principal residence or tuition fees for the following year. If you are facing eviction, you must show the notice. In the case of a natural disaster, you must document the incident and the cost of repairing damage to your primary residence. However, according to the latest data from 401(k) custodians, the number of withdrawals during hard times is increasing at an alarming rate. At Vanguard, hardship withdrawals reached an “alarming” record high, outpacing growth in loans and non-hardship withdrawals from retirement accounts. Fidelity and Ubiquity also noted growth in all three areas. At Ascensus, hardship withdrawals were up 33% from a year earlier, while loans were up just 15% and withdrawals were up 22%. “This could be a sign of a general deterioration in financial conditions,” said Ascensus Chief Operating Officer Rick Irace.

Paperwork Leads

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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