(775) 786-6141
Your Retirement Plan – Take a Loan or a Hardship Distribution?


More people are heading to their retirement plans at work for a bail out in today’s economic times. An individual will have financial options if he or she should be so lucky as to a have a retirement plan at work.

An employee may request a hardship distribution or a loan from their retirement plan at work, if available. There are strict rules that must be followed or unwanted tax consequences may occur due to non-compliance.

A retirement plan may, but is not required to, provide hardship distributions. The plan, if it provides for hardship distributions, must specify the criteria used to determine hardship. Hardship withdrawals are subject to income tax and the 10% early withdrawal penalty if the employee is under 59 ½ years of age.

Borrowing from your retirement plan is another option available if offered. The maximum amount a participant may borrow from his or her plan is 50% of his or her vested account balance or $50,000, whichever is less. A plan could include an exception to the 50% of the vested account balance limit if the balance is less than $10,000. A participant may borrow up to $10,000 if the exception is included in the plan.

Federal law mandates that participant loans must be repaid within five years and payments must be made at least quarterly. An exception to the 5-year rule is if the loan is used to purchase a primary residence. The rules for repayment for a primary home loan can vary by the individual plan.

Any outstanding participant loan balance in the event of termination of employment is treated as a fully taxable distribution at the time of separation from employment. The “distribution” may also be subject to the 10% early withdrawal penalty if the employee is under the age of 59 ½.

Depending on the personal situation, one option may be better than the other from a tax standpoint.

No repayment is required on a hardship distribution. Taxes must be paid on the distribution and may incur the 10% early withdrawal penalty as well.

Participant loans must be repaid but are not taxed as income unless employment terminates.



Barnard Vogler & Co.
100 W. Liberty St., Suite 1100
Reno, NV 89501

T: (775) 786-6141
F: (775) 323-6211


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