New Retirement Rules Make 401(k) Hardship Withdrawals Easier Amid Record-High Need

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The new retirement rules, part of the $1.7 trillion funding bill President Joe Biden is set to sign into law, will make so-called 401(k) hardship withdrawals easier. This comes amid a record-high number of said withdrawals as inflation continues to take a toll on Americans. 

Under the new rules — which are part of the Secure 2.0 retirement reforms — Americans will be allowed one distribution (or withdrawal) per year of up to $1,000, and a taxpayer has the option to repay the distribution within three years. In addition, the 10% tax penalty will be waived, but they won’t be able to make further withdrawals during the three-year repayment period or until the repayment occurs, according to the text of the bill.

In addition, the new rules will enable employees to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal, which is the case currently for some plans but not all, according to the Internal Revenue Service (IRS).

These hardship withdrawals can only be made if the distribution is both due to an “immediate and heavy financial need,” including medical expenses, funeral expenses, or tuition and related educational expenses, the IRS explains on its website.

“Our view is that anything that makes it easier for people to save and invest is a good thing, and Secure 2.0 fits that description,” said Ted Rossman, senior industry analyst at “More accessible hardship withdrawals can not only bail people out in hard times but also increase participation because some people don’t start investing for retirement because they’re worried they might need the money sooner. And being able to pay the money back would be preferable to taking money out and never getting it back into the market, or choosing never to invest it in the first place.”

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These new rules come against the backdrop of an all-time high of hardship withdrawals, according to a Vanguard report, which suggests an increased need for household liquidity due to increased financial strain. Another report, from Empower, found that hardship withdrawals jumped by 24% in the past year.

Some experts note that while the new rules might temporarily help some Americans, they might also represent a double-edged sword, as they could translate into potentially losing out on future growth.

“The new rules put more power in the hands of individuals but also take away some of the guardrails that were put in place for a reason,” said Bobbi Rebell CFP, author of Launching Financial Grownups and personal finance expert at Tally. “More Americans need hardship withdrawals, and so in the short term removing some financial consequences will take some of the pressure off of an already bad situation.”

Rebell, a financial wellness expert who advises companies on managing employees’ financial stress, added, however, that there are serious concerns about making money earmarked for retirement so much easier to access.

“The reality is that as much as someone might hesitate to pull money from retirement the first time, it can quickly become a habit and a de-facto emergency fund,” she said. “Allowing people to borrow from their future more easily sounds good on the surface but the long-term price may be steep. Most Americans don’t have defined benefit plans like pensions anymore. When they go to retire, they may find themselves disappointed with fewer options.”

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