With millions of Floridians still without power after Hurricane Irma, the Internal Revenue Service has announced its making it easier to tap retirement account money for needs related to Irmas fury. It applies to those who live in designated disaster areasand to those who live elsewhere who want to use retirement money to help a child, parent, grandparents or other dependent who lived or worked in the disaster area.
Its usually hard to qualify for an in-service distribution from your workplace retirement plan, but the IRS is bending the rules for Irmalike it did for Hurricane Harvey last month. Employer-sponsored retirement plans –401(k)s, 403(b)s, and 457(b) plans — can make loans and hardship distributions to victims of Hurricane Irma and members of their families without going through the usual hoops.
Mobile homes stand in a flooded neighborhood in Bonita Springs, Florida, U.S., on Tuesday, Sept. 12, 2017. Hurricane Irma smashed into Southern Florida as a Category 4 storm, driving a wall of water and violent winds ashore and marking the first time since 1964 the U.S. was hit by back-to-back major hurricanes. Photographer: Daniel Acker/Bloomberg
Retirement plans dont have to allow hardship withdrawals or loans, but under the relief, they can let employees do so before the plan is amended to specifically allow it. Its okay if the need for taking the money outshelter for exampleisnt listed as a hardship under the current plan rules. Basically, any hardship arising from Hurricane Irma is treated as an unforeseeable emergency for purposes of retirement plan distributions. In addition, some documentation requirements, which can be onerous, can be disregarded.
The special rules, spelled out in IRS Announcement 2017-13, apply between September 4, 2017 and January 31, 2018. The retirement plan relief is in addition to income and payroll tax relief provided to individuals and business taxpayers affected by Irma. See Forbes Kelly Phillips Erbs IRS, FINCEN Announce Tax Relief For Taxpayers Affected By Hurricane Irma.
Other rules still apply. If youre married, you need spousal consent (sign-off). Also, hardship distributions, except to the extent the distribution comes from aftertax contributions, will be taxable as income and likely subject to a 10% early withdrawal penalty. Taking a loan is a better option, but note that loans typically need to be repaid (with interest) within five years to your account. The law allows you to borrow up to $50,000 or half your vested balance, whichever is less.
Note: amounts attributable to rollover contributions (money you rolled into your existing 401(k) from a former 401(k)) may be accessible at any time.
Typically, if you take a distribution you cant contribute to the plan for another six months, but the special rules waive that restriction. Thats especially important if youre taking money out to help a relative but want to keep contributing to your plan to keep your retirement goals on track.
As of today, the Hurricane Irma disaster areas per FEMA eligible for tax relief include St. John and St. Thomas in the U.S. Virgin Islands; Canovanas, Culebra, Loiza, and Vieques in Puerto Rico; and 16 counties in Florida: Broward, Charlotte, Clay, Collier, Duval, Flagler, Hillsborough, Lee, Manatee, Miami-Dade, Monroe, Palm Beach, Pinellas, Putnam, Sarasota, St. Johns.
Note: if you have a Roth IRA, you can always withdraw the amount youve contributed at any time penalty-free and tax-free. See One Millennials Roth IRA Bet.