Retirement Planning Chula Vista

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Borrowing and Withdrawing Retirement Funds, PART 3

When facing the choice of whether to take money from your retirement fund before you retire, retirement planners urge Chula Vista residents to make sure that they know the penalties and consequences for their taxes and financial plan.

Previously, in PART 1 and PART 2, we looked at loan eligibility and the restrictions involved in taking loans out on your retirement plan. We then changed our focus to another form of borrowing from a retirement fund: hardship distributions.

In this, the final installment of the series, we shall be looking at the various restrictions and tax implications of hardship distributions.

Retirement Planning Chula Vista
Retirement Planning Advice for Chula Vista: Hardship Distribution Restrictions

The restrictions for 401(k) and 403(b) plans are similar, while the restrictions for 457(b) plans follow different rules.

For 401(k) and 403(b) plans, hardship distributions must be made on account of an immediate and financial need, and the amount must be limited to the amount necessary to satisfy the need, according to the IRS. Either your employer can determine this need using your documentation of the hardship, or you will be automatically considered to have an “immediate and heavy” need if the money is used for:

  • Certain medical expenses
  • Costs relating to buying a principal residence
  • Tuition/educational fees/expenses
  • Payments to prevent eviction or foreclosure on your principal residence
  • Burial/funeral expenses
  • Certain expenses for repair of damage to your principal residence

These needs may also extend to your spouse or dependent, should he or she need the funds. To prove that the amount is limited to the amount necessary to satisfy the need, you must take only the money you absolutely need, and you must also be able to prove that you are unable to reasonably obtain the funds from another source, including insurance, liquidation of assets or even loans.

A distribution is also automatically determined as necessary if it only covers the amount needed, you have obtained all other distributions and loans available from the employer’s plans and you aren’t allowed to make elective contributions to the plan for at least six months after taking the hardship distribution.

“For 401(k) and 403(b) plans, taking a hardship distribution will generally bar you from making elective and employee contributions to all plans maintained by your employer for at least six months,” explains a JKL Wealth Management retirement planner in Chula Vista.

The amount you take for a hardship distribution is limited to the total amount of elective contributions you have made to the retirement plan as of the date of distribution, not including the amount of any previous distributions of elective contributions. Notice that this amount does not include employer elective contributions or earnings on elective contributions.

For 457(b) plans, you may only take a hardship distribution if you are faced with what the IRS calls an “unforeseeable emergency.” Examples of this would include a severe illness, accident or loss of property due to a casualty such as a fire or tornado. However, expenses that you may not be able to afford but you could have predicted, such as the cost of buying a home or paying for tuition, do not qualify for hardship distributions under 457(b) plans. In addition, if you can pay for the cost of the emergency using insurance, asset liquidation or another method, these circumstances do not qualify you for a hardship distribution.

Retirement Planning Advice for Chula Vista: Tax Implications

Unlike loans from a retirement plan, in which you are only borrowing the money, hardship distributions are included in your taxable income for the year you received the distribution, unless the distributions are from designated Roth contributions. You will also usually have to pay a 10 percent early withdrawal tax on the distribution, unless you are using the money for something that is considered an exception to this rule.

“When considering the amount to withdraw, you should consider the taxes you will owe on the distribution—the IRS includes taxes you might owe on the distribution in its restriction that specifies the amount you take must be limited to the amount necessary to satisfy the need,” explains our Chula Vista retirement planner.

A Final Note on Borrowing or Withdrawing from Your Retirement Fund

When considering withdrawing or even borrowing money from your retirement account, these options should always be viewed as a last resort. Depleting your retirement savings can be dangerous, especially if you find that you can’t repay your loan or you will owe a large amount in taxes on early withdrawals. Before deciding to dip in to your retirement savings, consult with an experienced LPL financial advisor at JKL Wealth Management to see if you have any other options for emergency funds.

Let’s Get Connected!
If you want to get started on your journey today or would like individualized investment/financial advice from LPL financial advisor, John Lohrenz, please contact JKL Wealth Management at:

Phone: (858) 535-1705
Fax: (858) 535-1701
Email: john.lohrenz@lpl.com

Alternatively, fill out the Contact Form and we’ll get back to you shortly.

Physical Address
731 S. Hwy 101, Suite 2K, Solana Beach CA 92075

Securities and Advisory services offered through LPL Financial, a registered investment Advisor. Member FINRA/SIPC.


About Chula Vista, California

Chula Vista – the 76th biggest city in the U.S. – is a vibrant city located in the southern side of the state of California in America. Its total area spans about 52,000 square miles, with just over 49,000 square miles being made up of land and only 4.73 percent being made up of water. Chula Vista came to be inhabited as early as 3000 B.C. when the Yuman-speaking people moved to this area. “The city of Allure”, as it is nicknamed, boasts a warm Mediterranean climate. Another name for Chula Vista is ‘Chula-Juana’. Although home to a number of residents, the area sees many tourists staying here and visiting its popular sites including the Cricket Wireless Amphitheater and the Living Coast Discovery Center.