If you have a defined contribution plan, such as a 401(k), you should be eligible for a hardship withdrawal
. Such withdrawals are generally permitted when expenses are deemed to be immediate and significant.
Although best practices have been to limit loans and other causes of plan "leakage," loan and hardship withdrawal
features are more common among plans overseen by an adviser; 83.1% of plans with an adviser permit loans, compared to 76.9% of plans without an adviser, and 92.4% of plans with an adviser allow hardship withdrawals
, compared to 86.7% of plans without.
In spite of the perceived necessity, retirement savers almost never see a long-term improvement in their financial situation by choosing a loan or even a hardship withdrawal
, Fidelity says.
However, through loans or hardship withdrawal
provisions, money can be taken out of the plan before participants reach retirement age.
HOW TO RESOLVE: To help stop loan and hardship problems from happening, Kalish says, sponsors need to understand that the current self-serve environment for participants who want to take a loan or hardship withdrawal
should have its limits.
90.2%, or hardship withdrawal
provisions, 84.9% vs.
Sampson advises sponsors to consider allowing participants to take loans only to address an immediate need, though this would differ from taking an outright hardship withdrawal
Similar percentages apply to provisions for a hardship withdrawal
. In total, 14.4% of plan participants have at least one outstanding loan.Why even offer these provisions?
"Having loan and hardship withdrawal
features in a 401(k) plan is a mixed blessing-too handy for some folks, although most tend to leave it alone."
Both the decline in financial wellness and the increase in the percentage of employees who reported taking a retirement plan loan or hardship withdrawal
were most pronounced among lower-income employees, women and members of Generation X.
Under current law, retirement savers who are age 59 or younger may be subject to an additional 10 percent early withdrawal penalty for taking a hardship withdrawal
from their retirement account or an early distribution from their individual retirement account (IRA).