Taking Disaster Recovery Funds from Retirement Plans
By Beverly DeVeny
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After Hurricanes Harvey, Irma and Maria in 2017, Congress passed special legislation allowing expanded access to retirement plan funds for individuals affected by those storms. Congress also previously enacted that sort of legislation was for victims of Hurricane Katrina in 2005, victims of severe storms and tornadoes that struck the Midwest in 2008, and victims of the 2017 California wildfires No such legislation has been enacted yet for Hurricanes Florence and Michael.
Victims of 2018 federally declared disasters, such as the hurricanes, currently only have the relief that IRS can provide which consists mainly of extensions of various tax deadlines.
To see what IRS provisions are available for any federally declared disaster area, you can check the IRS website here: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
Individuals looking at sources of funding to recover from a disaster should be aware of the issues with using retirement funds. Distributions of pre-tax funds prior to age 59 ½ will be taxable and subject to the 10% early distribution penalty, if no exception to the penalty applies. Many employer plans will not allow access to plan funds prior to age 59 ½. Hardship distributions may be available to some plan participants (IRA funds are generally always available to account owners), but hardship distributions are still subject to the tax and early distribution penalty rules. Hardship distributions cannot generally be paid back. The funds are gone from your retirement plan forever.
Many retirement plan distributions can be repaid, but they must be repaid within 60 days of the receipt of the funds. For IRA or Roth IRA distributions, you can only do one repayment in a 12-month period. If you have already taken a distribution and paid it back in the past 12 months, you cannot receive another distribution that is eligible to be paid back until the 12 months has passed.
Only Congress can change these rules. We will have to wait and see if they offer relief to any victims of the disasters that have occurred in 2018.
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