Personal Foul…Roughing The Taxpayer: The IRS’ Triple Penalty On Hardship Distributions

Everyone knows of someone, a family member, a co-worker, a neighbor or just an acquaintance, who has been adversely affected by the downturn in the economy. For many, this means dipping into retirement accounts to help out others, to fund college tuition, to pay for unexpected medical bills or just to make ends meet. Then the surprise hits. The retirement account funds, filled with money that each participant paid in for reasons just like these, are not readily available.

To the extent that they are available, the funds come at a steep price even though the participant is in desperate need of the money. This article examines the IRS' triple penalty for hardship withdrawals from retirement accounts. First, this article describes the basics of a 401(k)/403(b) retirement plan. Next, this article explains the typical process and plan requirements that control the distributions from retirement accounts.

This article then chronicles the economic and tax ramifications of a participant who chooses to use his retirement money for other purposes. Finally, this article concludes by commenting on the unfairness and inequity of a retirement plan that penalizes participants who are the most in need and most vulnerable.