This article originally appeared as a column for the Cleveland Jewish News.
Clients who come through my door are often quite protective of their retirement funds – understandably so. After all, an individual typically spends his or her entire working life saving for retirement. A retired worker will probably be entitled to some Social Security benefits.
A lucky minority will have pension plans to count on. No matter the case, most workers will be looking to supplement their retirement incomes with payouts from an Individual Retirement Account, 401(k), 403(b) which is a tax-deferred type of account similar to a 401(k) but generally offered in the public and nonprofit sectors, or something similar.
Perhaps it is not surprising, then, that I am frequently asked about when such retirement plans can be touched, and by whom.
You probably are somewhat familiar with your plan’s rules and the associated tax laws governing your retirement age. No doubt you have named one or more beneficiaries who will receive the balance of your account should you pass away before being paid out all your saved monies. You probably already know you can “cash out” your retirement account – though, of course, you likely know you will pay a large penalty for doing so. You may know whether or not your plan permits you to borrow against your saved amount.
What you may not know is that funds in 401(k), 403(b) and some other accounts can often be taken out prior to retirement in event of a “hardship.” A hardship distribution is generally available in more extreme circumstances when funds are not available elsewhere. Qualifying hardships may include certain medical expenses, costs relating to purchase of a principal residence, certain expenses for repair of such a residence, payments necessary to prevent eviction from or foreclosure on one, tuition and related educational fees and expenses, or burial/funeral expenses.
You also may not know that retirement savings are generally safe from creditors – at least while they still sit in the account. This means that if money is due you, or if you owe money from a judgment, back due rent or funds owed from a lawsuit, for example, it is probably not going to be able to be collected from a retirement account. Similarly, retirement accounts generally will remain intact in spite of a bankruptcy. Note that back due child and spousal support is handled differently than other types of debt.
A further, but important point, which many find surprising, is that retirement plans are divisible upon a divorce. It is tempting and quite common to take the attitude that “I worked hard to earn that money, not my spouse. It’s mine and I shouldn’t have to share it!” However, according to the law, this simply is not true. Just as the house, the business, the bank accounts, and the debts get split upon a divorce, so, too, do the retirement accounts. As a general rule, anything that accrued during the marriage will be split, very likely equally. Yes, even pension plans. A specific type of order is issued to split up retirement plans so that tax-deferred accounts can be transferred to the ex-spouse with no penalties, and pension benefits can be paid out to the ex-spouse according to the plan’s standard retirement calendar.
As life expectancy increases and confidence in Social Security decreases, retirement savings plans will doubtless become more popular. If you are reading this, you likely have at least one such plan. Just as it pays you to take time to consider what investments you want to make, it makes sense to understand the rules and laws that affect how and by whom your money can be accessed. You can start by talking to your plan administrator.
*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.