Thinking about managing your tax bill before December 31? Download our 2024 Year-End Tax-Planning Guide here for tips and guidance.

What are the new rules for 401(k) hardship withdrawals?

The Bipartisan Budget Act passed in early 2018 relaxed some of the rules governing hardship withdrawals from 401(k)s and similar plans. Not all plans offer hardship withdrawals, but the ones that do will be required to comply for plan years beginning in 2019.

In order to take a hardship withdrawal from a 401(k) or similar plan, a plan participant must demonstrate an “immediate and heavy financial need,” as defined by the IRS. (For details, visit the IRS website and search for Retirement Topics – Hardship Distributions.) The amount of the withdrawal cannot exceed the amount necessary to satisfy the need, including any taxes due.1

Current (pre-2019) rules

To determine if a hardship withdrawal is qualified, an employer may rely on an employee’s written statement that the need cannot be met using other financial resources (e.g., insurance, liquidation of other assets, commercial loans). In many cases, an employee may also be required to take a plan loan first.

Withdrawal proceeds can generally come only from the participant’s own elective deferrals, as well as nonelective (i.e., profit-sharing) contributions, regular matching contributions, and possibly certain pre-1989 amounts.

Finally, individuals who take a hardship withdrawal are prohibited from making contributions to the plan — and therefore receiving any related matching contributions — for six months.

New rules

For plan years beginning after December 31, 2018, the following changes will take effect:

1. Participants will no longer be required to exhaust plan loan options first.

2. Withdrawal amounts can also come from earnings on participant deferrals, as well as qualified nonelective and matching contributions and earnings.

3. Participants will no longer be barred from contributing to the plan for six months.
 
1Hardship withdrawals are subject to regular income tax and a possible 10% early-distribution penalty tax.

 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

footerlogo

Securities offered through Emerson Equity LLC. Member FINRA/SIPC. Advisory Services offered through EagleStone Tax & Wealth Advisors. EagleStone Tax & Wealth Advisors is not affiliated with Emerson Equity LLC. Financial planning, investment and wealth management services provided through EagleStone Wealth Advisors, Inc. Tax and accounting services provided through EagleStone Tax & Accounting Services.

For more information on Emerson Equity, please visit FINRA’s BrokerCheck website. You can also download a copy of Emerson Equity’s Customer Relationship Summary to learn more about their role and services.

Download our Form CRS (Client Relationship Summary) by clicking here.

Download Form ADV by clicking here.

Download Form ADV Part 2A by clicking here.

Click here to learn more about our Privacy Policy and Information Security Program.

Click here to for additional disclosures

Investment products & services are only available to residents of CO, DC, FL, KS, KY, MA, MD, NC, NY, PA, SC, VA & WA.

Licensed to sell insurance and variable annuities in the following States: DC, DE, FL, MD, ME, MI, NC, NJ, NY, PA, SC, & VA.