One of the areas of concern expressed by many of our clients is access to retirement account funds if you need them before reaching the normal age of withdrawal. Specifically, they wonder about “hardship distributions” and the regulations surrounding them.

And who can blame them for asking, considering the volatility of the U.S. economy over the last 10-15 years? Many individuals who were “burned” when the housing crisis started in 2007-2008, followed by the Great Recession, are still wary even though the economic recovery has been progressing nicely and is forecast to continue that way.

When ‘hardship distributions’ come into play

So let’s take a look at distribution rules and when “hardship distributions” come into play.

What are Required Minimum Distributions?

All employer-sponsored retirement plans are subject to Required Minimum Distributions, as are traditional IRAs, IRA-based plans (SEPs and SIMPLE IRAs, for example) and Roth 401(k) accounts. Roth IRAs are exempt from the requirement while the account owner is alive.

The rules require that upon reading age 70½, a retirement account owner must withdraw a minimum amount from the account annually or else be subject to stiff penalties from the IRS. You can withdraw funds prior to reaching age 70½, but there these are subject to increased taxes.

The concern about hardship distributions often comes from those who have not yet reached the age at which they can take a distribution without penalty and yet have a great need for the funds. If they already have need of the funds, they certainly don’t want to incur tax penalties on top.

According to the IRS, a retirement plan may—but is not required to—provide hardship distributions. Many plans that provide for elective deferrals—401(k) plans, 403(b) plans and 457(b) plans—may provide hardship distributions. In the case of 457(b) plans, there are specific circumstances that fit the definition of “unforeseeable emergency.”

When it comes to an IRA, there are technically no hardship distributions allowed. That is because you can access your IRA funds at any time—but at a price. There can be unfavorable tax consequences, additional tax on early distributions or penalties and fees.

In order to take a hardship distribution from a 401(k) plan, you must show that you are doing so because of an immediate and heavy financial need. Further, the distribution must be enough to satisfy that need.

What constitutes an ‘immediate and heavy’ need?

Here are some that qualify:

• Certain medical expenses
• Costs relating to the purchase of a principal residence
• Tuition and related educational fees and expenses
• Payments necessary to prevent eviction from, or foreclosure on, a principal residence
• Burial or funeral expenses
• Certain expenses for the repair of damage to the employee’s principal residence

In some cases, your need could be considered immediate and heavy even if it was “reasonable foreseeable” or voluntarily incurred.

But don’t even think about asking for hardship funds for that new 4K flat screen TV or a much-needed vacation!

Even when your need meets the “immediate and heavy” definition, if you have sufficient funds available elsewhere, you may not be allowed to withdraw those funds from your retirement account.

Proving you are experiencing a hardship

If the plan in question allows for a hardship distribution, it should offer specifics about what constitutes such a hardship.

The amount you are allowed to withdraw in the event of a hardship cannot be more than your elective contributions. Additionally, there are other requirements that may need to be met.

In all cases, it is advisable for you to confer with your employer or plan administrator as well as tax, financial or legal adviser in regard to your specific circumstances.

For more information from the IRS, click here.