Some notable developments are about to impact 401(k) plans. They follow a major change that became effective in 2018. Thanks to the Tax Cuts & Jobs Act, workers who borrow from 401(k) accounts and leave their jobs now have until October of the following year to repay plan loans.1
The Internal Revenue Service has eased the rules on 401(k) hardship distributions. Plan participants who arranged such withdrawals in 2018 (and years prior) paid an opportunity cost. The Internal Revenue Code barred these employees from making periodic contributions to their 401(k) accounts for six months after the withdrawal, and it also prevented them from exercising any stock options for that length of time.2
In 2019, some flexibility enters the picture. The Bipartisan Budget Act (BBA) of 2018 (passed in February) allows plan sponsors to remove both of those restrictions in 2019, if they wish.2
Some fine print worth noting: the BBA also permits plan sponsors to give employees more sources for hardship withdrawals. In 2019, plan participants may take hardship distributions from their 401(k) account earnings, qualified non-elective employer contributions (QNECs), and qualified matching contributions (QMACs) in addition to elective deferral contributions, discretionary employer profit-sharing contributions, regular matching contributions, and earnings on contributions made before December 31, 1988.2
In 2018 and years prior, a plan participant could only take a hardship distribution after taking a loan from his or her 401(k) account. Next year, plan sponsors can waive this requirement, if they choose, and let their employees take hardship withdrawals from 401(k)s without a loan first.2
In addition, plan sponsors may let victims of California wildfires make special hardship withdrawals. An individual who suffered economic losses due to the massive fires in the Golden State (and whose principal residence is in a California wildfire disaster area) may take qualified wildfire distributions of up to $100,000 from a 401(k) through December 31, 2018. The money withdrawn is fully taxable, but the withdrawal is not subject to a 10% early withdrawal penalty. The amount withdrawn can also be recontributed to the plan within three years of the distribution. This type of hardship withdrawal may be permitted immediately; the plan sponsor has until the last day of the first plan year, beginning on or after January 1, 2019, to revise the plan documents to denote the new terms.2
What do these rule changes mean for companies sponsoring 401(k) plans? The message is clear. Review your plan documents and hardship withdrawal guidelines before 2019 begins, and decide whether you want to include these provisions.
Lastly, annual contribution limits for 401(k) accounts are rising. An employee can put up to $19,000 into a 401(k) in 2019, up from $18,500 in 2018. The annual limit on “catch-up” contributions, allowed for plan participants aged 50 or older, remains at $6,000.3
Trust. Confidence. Guidance.
What are your short- and long-term financial goals? From your first job to retirement—whatever your age or stage—the experienced Wealth Advisors at Tower Wealth Management® can help you work towards a successful financial future.
Tower Wealth Management is the financial planning and investment management group located at Tower Federal Credit Union, and their services are available exclusively for Tower members. Schedule a no-cost, no-obligation appointment today.
Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Tower Federal Credit Union and Tower Wealth Management are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Tower Wealth Management, and may also be employees of Tower Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Tower Federal Credit Union or Tower Wealth Management. Securities and insurance offered through LPL or its affiliates are:
|Not Insured by NCUA or Any Other Government Agency||Not Credit Union Guaranteed||Not Credit Union Deposits or Obligations||May Lose Value|
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – forbes.com/sites/ashleaebeling/2018/01/16/new-tax-law-liberalizes-401k-loan-repayment-rules/ [1/16/18]
2 – pillsburylaw.com/en/news-and-insights/recent-and-upcoming-changes-to-401k-plans.html [3/8/18]
3 – nytimes.com/2018/11/09/your-money/401k-contribution-limits-raised-irs.html [11/9/18]