February 19, 2018
401K Hardship Withdrawals Are Eased Under New Budget Act:
Along with increasing the discretionary contribution caps for 401k accounts, the new Tax Cuts and Jobs Act that the Trump Administration introduced will also lighten the laws on what is considered a "hardship" for people who need to withdrawal funds from their 401k account during personal emergencies.
These laws will not only make it easier for people to access their funds during hardship, but it will also help lessen the penalties that people face for withdrawing money from their accounts during certain emergency situations.
The following rule changes that will affect you and are the keys to the 401k hardship withdrawal that were passed with this new Tax Cuts and Jobs Act1:
What Changes Are Included In This New Legislation?
- The 6 month prohibition on contributing to your 401k after taking a hardship withdrawal will be lifted as of December 31st, 2018.
- QNECs & QMACs as well as profit-sharing contributions now may be included in what can be taken out via hardship withdrawals.
- Special disaster-relief rules have been set into place for the victims of the California wildfires to help them use the funds in their accounts to recover from the terrible tragedy and devastation that they have suffered at the hands of the fire.
- Created a new committee that will be called the Joint Select Committee on Solvency of Multiemployer Pension Plans which will solve any sort of multi-employer pension plan solvency issues that may arise in the future.
- Creates new Form 1040SR which is for seniors over the age of 65 which allows people to file simplified taxes after they are of retirement age and will be similar to the Form 1040EZ.
How Are People Helped Through These Laws?
People who are able to withdraw from their 401ks and are assisted in several other ways as well. They are ensured that they are able to do these withdrawals while minimizing the effects that borrowing these funds has on their future. The following are ways that people benefit from these new laws:
401K Withdrawals Do Not Stop You From Saving For 6 Months:
If you have to withdraw money from your 401k for a hardship, you do not have to wait the 6 months to start using your wages to contribute to your 401k2 as you had to before. As of 2019, you will be able to begin or continue contributing more money to your 401k immediately, soon as your hardship as passed. This 6 months period of being able to save can make a massive difference as the funds compound over years of working, which can help push you towards a more sound financial retirement once your working days are in the past. These benefits also extended to continue to allow contributions to individuals who are contributing to profit sharing or stock bonus plans as part of their retirement plan as well.
Cancels 10% Penalty For Those Leaving Their Jobs:
Typically, if someone chose to leave their job they would have only 60 days to pay back any "hardship" funds they borrowed3 during that time. However, as of January 1st, 2018 that is no longer the case. This allows people to quit jobs, switch jobs, or gain new employment and borrow money from their 401k to "bridge the gap" for the families without worrying about paying another additional 10% income tax fee on the money they withdrew.
Oftentimes, these jobs advancements and changes are what will help people move from one job to a higher-paying one. It can help their family live a more comfortable lifestyle with a higher income. People will be less shy to do that if they aren't paying 10% of all the funds they withdraw from their account in income taxes. That money can go to help their family pay their living expenses till that person is working again.
Hardship Withdrawal Limits Raised For California Wildfire Victims:
Victims of the tragic, deadly California wildfires were allowed4 to take up to $100,000 out of their 401k accounts without the 10% withdrawal penalty from October 8th, 2017 to December 31st, 2017, even if they were not yet 59 1/2 years old. This helped many families recover from the tragic fires without having to dip further into their retirement savings to pay income tax penalties to the government. Instead, that money went to help get hard-working American families back on their feet and back to living their lives soon as possible.
These are just a few ways in which the new Tax Cuts and Jobs Act is benefiting Americans by easing some of the withdrawal penalties when they are pulling funds from their 401k to help them get through a hardship before they move on with their daily lives.
For more information on how these laws related to 401ks that were passed in the Tax Cuts and Jobs Act will effect you and your employees please feel free to contact us.
Sources:
1. http://www.napa-net.org/news/technical-competence/legislation/retirement-provisions-included-federal-budget-deal/?mqsc=E3935247
2. https://www.planadviser.com/hardship-withdrawal-changes-included-budget-deal/
3. https://www.forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/#28b477c940f7
4. http://ktserisacorner.com/?p=1651