Sometimes it’s illegal to spend money you’ve set aside for yourself.
When you save money in many types of business retirement accounts, the Internal Revenue Service does not collect income taxes on that money until you are able to withdraw it when you are older.
Do you need money beforehand? Certain types of “hardship withdrawals” are permitted. But you have to have a very good reason, and you definitely can’t lie about it.
A court hearing was held last week following a rare case of this type of legal violation. Federal prosecutors had convictions against Marilyn Mosby, the former Baltimore prosecutor who is perhaps best known for bringing charges against police officers in connection with the 2015 death of Freddie Gray, for making improper withdrawals and submitting a false mortgage application When purchasing a mortgage loan, condominium in Florida is obtained.
Ms. Mosby will spend up to 12 months in home confinement pending a successful appeal or the presidential pardon she requested.
Your case is complicated because the penalty involves more than just unauthorized withdrawals. And her false claim that she was in financial distress and needed to withdraw money from her retirement account in the city occurred during the coronavirus pandemic in 2020, when alternative, one-time rules were in place.
Nevertheless, withdrawals in hardship cases are widespread.
Below are some questions and answers about what happened in Ms. Mosby’s case and what the rules actually apply. Keep in mind that employers have significant discretion in setting the rules for their retirement plans and that there may be slight differences between the rules for 401(k)s, 403(b)s and 457 plans.
Just to be clear: Can you really go to jail for withdrawing money from your company retirement account?
Yes. Although the judge allowed Ms. Mosby to avoid prison time, prosecutors tried to keep her there.
But that was her own money, right?
Technically, the money belongs to the trust that contains the retirement plan, but there are numerous restrictions on how the money that is deposited for participants can be used.
“It’s the plan money that you have certain rights to,” said 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.”
OK, but why do these restrictions even exist?
It’s a privilege to have to wait decades before paying income taxes, as you can with corporate retirement accounts. In return, lawmakers want to ensure that people use the money for their own retirement and not for other things.
“If you want access at any time, don’t take the tax break,” Ms. Mayo said.
How do these “hardship” exceptions work?
Lawmakers understood that this sort of thing was happening, but they wanted to only let people (who hadn’t yet reached retirement age) withdraw money from retirement savings if things were really bad.
If your employer allows it, you can make a withdrawal in cases of hardship. What does “emergency” mean? Start by defining your employer, if you have one.
In its FAQ on these hardship distributions, the IRS says withdrawals from 401(k) plans must be made because of an “immediate and substantial” need and the amount must be reasonable given the size of the need. You should also have exhausted “other resources” before seeking hardship relief.
The IRS’s examples of qualifying needs that an employer might allow include medical expenses, education-related bills, threat of eviction or foreclosure, and funeral expenses.
Generally, you pay taxes on hardship withdrawals, and you can’t return the money to your retirement savings in the same way you could if you took out a 401(k) or similar loan.
Do the early withdrawal rules differ for individual retirement accounts?
Yes, they are more lenient, but in many cases taxes still apply.
The hardship regulations for company pension schemes only changed in 2020 for this year. What was different?
The most important change was a looser definition of hardship. People could withdraw up to $100,000 if, as a memo from Ms. Mosby’s retirement plan administrator put it, they suffered “adverse financial consequences due to quarantine, furlough, layoff, reduced work hours, or inability to work due to lack of child care.” “
What hardship did Ms. Mosby claim and how could prosecutors convince a jury that this was not true?
Ms. Mosby kept her day job during the pandemic but also started some side businesses — before the coronavirus outbreaks began — which she said were affected in 2020.
The jury did not believe her plight was real, even though her 457 plan administrator, Nationwide, had allowed her to withdraw. (She purchased two properties in Florida within months of the withdrawals.)
Did the Federal Prosecutor’s Office charge many people with similar crimes in 2020?
No. I could not find any additional cases and the U.S. Attorney’s Office in Maryland declined to comment on the existence of other cases. If anyone knows of any, please send them to me.
Do people generally get into legal trouble because of hardship withdrawal fraud?
There appear to have been only a handful of cases in the last 20 years. Some are individuals who lied about their circumstances and plans for the money. Others are people who helped their colleagues make inappropriate hardship withdrawals.
How much do I have to worry about getting into trouble because of an impermissible hardship withdrawal?
If you tell the truth, you don’t have to worry. But a recent change in federal law could make it easier for more people to spread the truth.
One result of the Secure 2.0 Act of 2022 is that employers may become more likely to require employees to self-certify their hardship. If an employer allows this, employees can confirm the facts of their situation without having to provide the employer with financial documents to support it.
If employers don’t keep their employees under control, people may be more tempted to cheat. If this is the case, it is up to the IRS to find out through an audit. In this case, you will almost certainly need documents to prove hardship.
What alternatives should people consider before making a hardship withdrawal??
If you find yourself in a difficult situation, you may have already thought about most of the options. However, you may want to consider a loan from your company pension plan if this option is offered. However, keep in mind that repeated borrowing could jeopardize your savings and force you to work longer or retire with much less money.
Susan Beachy contributed to the research.
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2024-06-01 17:00:07
www.nytimes.com
