Can You Use Your Retirement Plan Money After a Disaster?

If you have been affected by Hurricane Helene, Hurricane Milton, or another recent federally declared major disaster, you may be relieved to hear that, it has become easier to access your retirement plan and IRA money. Following is a summary of the rules for qualified disaster recovery distributions and disaster-related plan loans. For more information, please contact your retirement plan or IRA Administrator.

Penalty-free distributions

Since 2019, many retirement plan participants affected by disasters have had the option to take a hardship withdrawal from their accounts to help recover from qualified losses. Usually, hardship withdrawals are subject to a 10% early-distribution penalty if you take a distribution before you are age 59½, this is in addition to ordinary income taxes.

In 2022, the SECURE 2.0 Act created a new provision allowing retirement savers to take qualified disaster recovery distributions of up to $22,000 in total, penalty-free. Types of retirement plans included are 401(k), 403(b), 457(b), and IRA's.

The distribution must be requested within 180 days of the disaster or declaration. Ordinary income taxes will still apply to qualified disaster recovery distributions but account holders may spread the income, and tax obligation, over three years.

Also account holders have the option of repaying the amount distributed, in whole or in part, to any eligible retirement plan within three years to avoid the tax cost entirely.

You may qualify for a disaster recovery distribution if your primary residence is in the disaster area and you have suffered a disaster-related economic loss. Examples of qualifying losses include:

• Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, or wind

• Loss related to displacement from the individual's home

• Loss of livelihood due to temporary or permanent layoff

Plan loans

Rather than taking a distribution and having to report it as taxable income, it may also be possible to borrow from plan accounts.

Plan loans generally need to be repaid within five years. And, with respect to a qualified disaster, employers may raise the loan limit to as much as the full amount of the account balance or $100,000, whichever is less. Employers can also extend the period for any outstanding loan payments by up to one year.

For more information on qualified disaster recovery distributions and disaster loans, please contact your IRA or retirement plan administrator.

For more information about disaster assistance available from the IRS, please visit www.irs.gov/newsroom/tax-relief-in-disaster-situations.

And contact MNM Vested, LLC