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It Just Got Easier for Harvey Victims to Use 401(k) Funds for Recovery
You’ve seen the heartbreaking photos of Hurricane Harvey’s aftermath. As of Wednesday, the megastorm dumped more than 51.9 inches of rain and 19 trillion gallons of water on southeastern Texas, USA Today reports.
Victims are now coming to terms with the severity of the damage to their homes and personal belongings. Soon, they will be forced to face the financial damages as well.
The IRS recently announced it would make it easier for victims to tap into their 401(k) accounts to cover flood-related expenses.
While money may be the last thing on victims’ minds right now, they should be aware of what’s to come after borrowing that retirement money.
The New Rules for Hurricane Harvey Victims
On Aug. 30, the IRS relaxed the requirements for Hurricane Harvey victims who need to tap into their 401(k) and 403(b) plans.
Retirement plan providers can now allow victims to access funds for things like food and shelter through hardship withdrawal, and they don’t have to require certain documentation. Typically, hardship distributions don’t include these areas of need; the change comes in hopes of getting people help as soon as possible.
The relaxed rules also make it easier for victims’ family members from anywhere in the country to pull a hardship distribution.
Victims of Hurricane Harvey are defined by the IRS as those whose main home or place of employment is in one of the Texas counties identified for individual assistance by FEMA on Aug. 23; a full list of affected counties can be found here.
Most retirement savings plans already allow individuals to take out loans and distributions for hardships, but the changes allow some plans that don’t already have hardship distributions to offer them to victims, TIME Money reports.
Hardship distributions don’t have to be repaid, but they’re subject to a 10% penalty for early withdrawal, and they get taxed as part of the individual’s gross income.
Those seeking to use retirement funds without facing big penalties also have the option of using 401(k) loans. When you take a loan from your retirement savings, those funds aren’t subject to taxes, but you must repay them within a certain time frame.
CNBC reports that about 80% of Hurricane Harvey victims don’t have flood insurance. For many, tapping into retirement savings for survival could be the only choice.
In 2005, Congress passed a law that allowed Hurricane Katrina victims to take qualified distributions of up to $100,000 without penalty. According to TIME Money, lawmakers may follow suit for Harvey victims, bringing at least some relief when it comes to rebuilding their lives.
Kelly Smith is a junior writer and engagement specialist at The Penny Hoarder. Catch her on Twitter at @keywordkelly.