Sometimes it is illegal to spend money you have set aside for yourself.
When you save money in various types of workplace retirement accounts, the Internal Revenue Service doesn't collect income taxes on that money until you're older and it's time to take it out.
Do you need money before that? Certain types of “hardship” withdrawals are permitted. But you have to have a very good reason and you can't lie about it.
A sentencing hearing was held last week after a rare incident involving this type of violation of the law. Federal prosecutors have convicted former Baltimore prosecutor Marilyn Mosby of impermissible withdrawals and making a false mortgage application to purchase a home, best known for filing charges against police officers in the 2015 death of Freddie Gray. received. Condos in Florida.
Mr. Mosby faces up to 12 months confined to his home unless his appeal or presidential pardon is successful.
Her case is complex in that it is not just a sentencing for inadmissible withdrawal. And her false claims that she was experiencing financial hardship to withdraw money from her city retirement account occurred during the 2020 coronavirus pandemic when the alternative one-time rule was in effect.
Nonetheless, hardship withdrawals are widely available.
Next is Ms. Here are some questions and answers about what happened in the Mosby case and what the actual rules are. Keep in mind that employers have considerable discretion in how they set the rules for their retirement plans, and there may be some differences between the rules for 401(k), 403(b), and 457 plans.
Simply put, can you really go to jail for taking money out of your workplace retirement savings account?
yes. Her judge allowed Ms. Mosby to avoid prison, but her prosecutors tried to put her behind bars.
But this was her own money, right?
Technically the money belongs in the trust containing the retirement plan, but there are many restrictions on what can be done with the money held for the participant.
“It’s the money in the plan that you have certain rights over,” says Kelsey Mayo, an attorney and benefits expert based in Charlotte, North Carolina. You may have a right to the money, but you may not have a right to the money right now. ”
great. But why do these restrictions exist?
Waiting decades before paying income taxes using your workplace retirement accounts is a privilege. In return, lawmakers want to make sure people use that money for their own retirement and not for other purposes.
“If you want access at any time, don’t take the tax break,” Mayo said.
So how do these ‘hardship’ exceptions work?
Lawmakers understood that it happens, but they wanted people (who weren't yet of retirement age) to be able to withdraw money from their retirement savings only if something really bad happened.
So, if your employer allows it, you can opt out if you're having a hard time. What does “difficult” mean? Start with whatever definition your employer provides.
In these FAQs about hardship distributions, the IRS says withdrawals from 401(k) plans must be made because of “immediate and serious” need and the amount must be appropriate based on the size of the need. You'll also need to exhaust all your “other resources” before you run into difficulties and withdraw.
Examples of qualifying claims that the IRS may allow employers include medical expenses, education-related bills, threats of eviction or foreclosure, and funeral expenses.
You'll typically pay taxes on hardship withdrawals, and you won't be able to pay back money into your retirement plan the way you can when you take out a 401(k) or similar loan.
Do individual retirement accounts have different early withdrawal rules?
Yes, it's more generous, but it's still often taxable.
Hardship rules for workplace retirement plans changed for that year only in 2020. What was different?
The main change was a looser definition of hardship. According to a memo from Mr. Mosby's retirement plan administrator, people can withdraw up to $100,000 “if they have suffered adverse financial consequences due to being quarantined, laid off, laid off, having their hours reduced, missing work, lack of child care, etc.” .”
What difficulties did Mr. Mosby claim, and how did the prosecution convince the jury that that was not true?
Mosby has maintained her day job throughout the pandemic, but she also started a few side jobs before the coronavirus hit, which she said has affected her in 2020.
Even though Nationwide's 457 plan administrator allowed her to withdraw, the jury did not believe her hardship was real. (She purchased two properties in Florida within months of her withdrawal.)
Have federal prosecutors charged many people with similar crimes in 2020?
no. I was unable to find any other cases, and the U.S. Attorney's Office in Maryland declined to comment on the existence of any other cases. If anyone knows, please send it to me.
In general, have you ever experienced legal difficulties due to high-level withdrawal fraud?
There seem to have been only a handful of cases in the last 20 years. Some include individuals who lied about their circumstances and plans for their money. Others involve people whose colleagues have inappropriately helped them struggle and withdraw.
How worried should you be that you will suffer hardships due to impermissible hardship withdrawals?
Truth be told, you have nothing to worry about. But recent changes in federal law have made it easier for more people to amplify the truth.
One result of the Secure 2.0 Act of 2022 is that employers may be more likely to allow employees to self-certify their hardships. If the employer allows it, workers can prove the facts of their situation without having to submit financial documentation to the employer.
When employers don't keep workers in check, people may be more tempted to lie. If so, it's up to the IRS to find it in an audit, in which case documentation will almost certainly be required to prove hardship.
What alternatives should people consider before struggling and withdrawing??
If you're in a difficult situation, you've probably already thought of most of the possibilities. However, if your workplace retirement plan offers a loan option, it may be a good idea to consider it. Keep in mind that borrowing repeatedly can reduce your savings and force you to work longer or retire with much less money.
Susan Beachy contributed to the research.