Someone in your family a victim of Hurricane Harvey? The IRS says your retirement plan may be able to help
Posted on September 7, 2017
According to the IRS, 401(k)s and similar employer-sponsored retirement plans, “May be used to make loans and hardship distributions to victims of Hurricane Harvey and members of their families.” Our CPAs note this IRS ruling is similar to relief provided last year to flood victims and victims of Louisiana and Hurricane Matthew.
Qualifying retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, many parts of Texas qualify for individual assistance. (Visit https://www.fema.gov/disasters for a complete list.)
This means that a retirement plan can allow a victim of Hurricane Harvey to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area. To qualify, hardship withdrawals must be made by January 31, 2018.
Interestingly, the IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape and documentation.
Citizens will be allowed to make loans or hardship distributions before this new rule is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, allowing it, for example, to be used for food and shelter.
Teipen Selanders Poynter & Ayres CPAs caution that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax.
If you have a question about retirement plans and how they can be used to help during any type of hardship, we’d be happy to help you determine how IRS rules and regulations affect you. Just give us a call.