The U.S. government shutdown that began in late December 2018 is taking its financial toll on a significant number of federal workers and has contributed to an overall increase in the number of working Americans who are taking money out of their retirement plans.
In a business Q&A with The Oklahoman, attorney Lake Moore explained how many retirement plans, including the federal government’s Thrift Savings Plan, contain a provision that allows participants who are suffering a financial hardship to take distributions from their accounts if certain requirements are met. The downside, though, is that such distributions are subject to income tax, and participants younger than 59-1/2 years of age will also be assessed a 10% penalty.
Moore also discussed how the Budget Act of 2018 has made it easier for plan participants to take a hardship distribution.
“For private-sector employers, the Budget Act of 2018 softened the hardship distribution rules at the employer’s election,” said Moore. “Prior to the new law, when an employee took a hardship distribution, they were required to be suspended from making new 401(k) deferrals for six months. The Budget Act of 2018 allowed employers to remove this requirement. Also, prior to last year’s Budget Act, employees were required to first take a loan from their plan before receiving a hardship distribution, which may not be the best outcome for the employee. Last year’s Budget Act also eliminated this requirement. The act additionally broadened the sources available for a hardship distribution.”
Retirement plan participants should consult with their plan’s administrator for more information about hardship distribution requirements.