Accessing the funds in your Ministers’ Retirement Plan account prior to age 59½ is made extremely difficult by the Internal Revenue Service rules. Simply stated, the IRS says you cannot access your funds unless you have an “immediate and heavy” financial need. While we would believe that any need we face creates an “immediate and heavy” financial need, the IRS provides for six situations that meet this criterion:
- Uninsured medical expenses incurred by you, your spouse, or any of your dependents;
- Costs related to the purchase of your principal residence (not including mortgage payments);
- Payment of tuition and related educational fees for the next 12 months of post-secondary education for you, your spouse, your children, or your dependents;
- Payments necessary to prevent your eviction from your principal residence or foreclosure on the mortgage on that principal residence;
- Funeral expenses for your spouse, your children, your parents, or your dependents; or
- Payment for the repair of damages caused to your principal residence by a natural disaster.
Self-certification of such a hardship is not sufficient. Documentation to prove the hardship must be submitted along with your request for the withdrawal.
Even if a participant qualifies for one of these provisions, as defined by the Internal Revenue Code, the participant is not automatically qualified for a hardship distribution. For example, according to the Internal Revenue Code a participant cannot take a hardship distribution if he or she has the option of taking a loan from their account. In addition, if the participant takes a hardship distribution, he or she cannot make salary reduction contributions to their pension account for at least 6 months. The rules imposed by the IRS and the Revenue Code are very stringent – and are written to serve as a deterrent from participants accessing their retirement accounts.
Simply stated, the IRS puts up every possible roadblock to keep a participant from accessing his or her retirement funds. Their theory is that participants in a tax-deferred retirement fund are given tax-preferred treatment for saving – and that they should not be able to access those funds until retirement.
Even if a participant qualifies for a hardship withdrawal, a 20% federal income tax withholding is required, an early surrender fee of up to 6% may apply, and a 10% federal tax penalty may apply – not including state tax liability, whatever that might be. Theoretically, by taking a “hardship” distribution a participant could be looking at a loss of 40% or more.
While circumstances may dictate that a “hardship” distribution is your only option, if at all possible taking such a distribution should be avoided. The costs are just too great.