An End-Around on Hardship Withdrawal Rules

It seems we don’t need to wait anymore for major pieces of legislation in order to get changes made in 401(k) plans. The Bipartisan Budget Act passed back in February contained several significant changes in the laws surrounding hardship withdrawals. Hardship withdrawals are premature distributions that are permitted from a retirement plan typically for reasons preapproved by the IRS and only if the request meets the immediate financial need. Hardship withdrawals have always been subject to taxation and an early withdrawal penalty, so they should only be considered for the direst of emergencies.

The new rules, effective in 2019, seem intended to make it easier for participants to take premature distributions from plans while eliminating some of the consequences. Up until now, if a participant took a hardship withdrawal, they would be suspended from making contributions for a period of six months afterwards. The new law does away with this suspension.

Previously, participants first needed to apply for a plan loan before requesting a hardship withdrawal, since loans have less tax impact as long as the loan is repaid. The new law does away with this requirement and allows hardship withdrawals without first applying for a loan.

Finally, the new rules open up the sources of money available for hardship withdrawals. Previously, many plans allowed hardship withdrawals only from the contributions made by that participant to the plan. The new rules allow distributions to include the earnings on participant sources as well as many employer contribution sources such as matching contributions.

While the rule changes tucked into the budget act may be viewed as beneficial for participants who need to access their money during their working years, these changes come at a cost. Increased distributions mean more money will be subject to full taxation and the 10% early distribution penalty. Also, increased hardship distributions do nothing to help you accumulate the cash you need to fund your retirement income which, after all, is what these plans are all about.


Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC, Frenkel Benefits – an EPIC Company, and LPL Financial are separate and non-affiliated companies.

Contributions to a traditional 401(k) may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Securities regulations prevent Gary from publicly responding to comments on this blog post. Third party posts found on this profile do not reflect the views of LPL Financial and have not been reviewed by LPL Financial as to accuracy or completeness.

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