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Early Withdrawals

You've worked hard to build up your workplace retirement plan balance, but life is full of unexpected developments. You may face a financial emergency before your retirement, which is why many plans allow you to take a hardship withdrawal from your account. Be aware however that taking a hardship withdrawal comes with a steep price tag—for both now and later.


Think Twice Before Taking a Hardship Withdrawal

If you're younger than 59½, you may pay ordinary income taxes plus a 10% early withdrawal tax penalty on the amount you withdraw.

  • You may not be allowed to contribute to the plan for at least six months.
  • You'll miss out on the potential tax-deferred growth of both the amount you withdraw and your stopped contributions.

Hypothetical example: Ed, who is 40 years old and in a 25% tax bracket, needs money for a down payment on a house. He decides to take a hardship withdrawal of $10,000 from his plan. After paying $2,500 in federal income taxes, plus a $1,000 penalty for early withdrawal, he's left with only $6,500. His future loss is even greater: At a hypothetical 6% return compounded weekly over 20 years, that $10,000 would have grown to $33,178. *


About Hardship Withdrawals

  • Most plans allow hardship withdrawals.
  • Hardship withdrawals operate under strict IRS and plan guidelines.
  • You must show a significant and pressing financial need.
  • You may have to exhaust all other financial resources or options, such as taking a plan loan.
  • Some plans limit financial hardship to unforeseeable emergencies, such as medical expenses, funeral costs, and foreclosure or eviction.
  • Many plans expand hardship definitions to include other needs, such as educational expenses or the purchase of a home.


Create Your Own Safety Net

As we live longer in retirement, it's more important than ever to keep your money growing for when you'll need it most. A few simple steps can help you keep your retirement plan savings off-limits: establish an emergency fund covering three to six months of expenses; create a separate housing account for a down payment; and explore tax-deferred college savings plans.

Taking a hardship withdrawal could have a dramatic effect on the size of your nest egg in retirement. Be smart and use this option only as a last resort. You may want to consult a financial professional before making your decision.

 

 

* Hypothetical results are for illustrative purposes only and are not intended to represent the future performance of any investment option. The principal value and the return of the investment options will fluctuate with changes in market conditions, and shares or units, when redeemed, may be worth more or less than their original cost. Taxes may be due upon withdrawal.

Many tax planning strategies emphasize the deferral of current income taxes, on the basis that your federal income tax rate may be lower at retirement. Please keep in mind that federal income tax rates are unpredictable and may be higher when you take a distribution than at the time of deferral. Other factors, including state tax rates and your income, may also affect your overall tax rate upon distribution. Please consult with your tax advisor for individual tax planning strategy and advice. The Hartford does not predict or in any way guarantee favorable tax results.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. This information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

NOT INSURED BY FDIC OR ANY FEDERAL GOVERNMENT AGENCY - MAY LOSE VALUE - NOT A DEPOSIT OF OR GUARANTEED BY ANY BANK OR ANY BANK AFFILIATE

RPS 6905 7/10