How To Withdraw Retirement Funds Post-Disaster Penalty-Free

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Key Points​

• Qualified individuals can withdraw up to $22,000 from retirement accounts without the 10% penalty.
• Employers may offer increased loan limits, allowing up to $100,000 or the vested balance, and extend repayment terms by up to one year.
• Withdrawals can be taxed over three years or repaid within that time to reverse the tax impact.

In the wake of disasters such as the wildfires that devastated Los Angeles, individuals impacted may face significant financial strain. For those with retirement savings, the SECURE 2.0 Act offers special provisions to access these funds without the usual penalties.

Key options include:

• Withdrawals from a qualified retirement account (such as an IRA or 401k) up to $22,000 without incurring the 10% penalty.
  
• Higher 401k or 403b loan limits of up to $100,00, with longer repayment terms

Here's what to know.

Withdraw From A Retirement Plan Penalty-Free​

Under SECURE 2.0, qualified individuals can withdraw up to $22,000 from their retirement accounts without incurring the 10% penalty typically applied to early withdrawals.

This amount can be included in taxable income spread evenly over three years, lessening the immediate tax burden.

Alternatively, you have the option to repay the withdrawn funds to your account within three years. This repayment effectively reverses the distribution for tax purposes, allowing you to file amended tax returns to recover taxes already paid.

Larger Loan Limits​

For employees with 401k or 403b accounts, employers may allow higher loan limits for qualified individuals, raising the cap to the lesser of $100,000 or your vested account balance.

Loan repayments can also be delayed for up to a year if the loan was outstanding during the disaster period.

Related: 401k Loan Pros and Cons

Who Qualifies​

According to the IRS, a taxpayer may be eligible for relief that provides for expanded access to their retirement funds if their principal residence was in a major disaster area and they sustained an economic loss due to that disaster. The major disaster needs to be listed by FEMA.

An economic loss includes, but is not limited to:

• Being displaced from the taxpayer’s principal residence.
• Loss or damage to or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause.
• Lost income due to temporary or permanent layoff.

Key Considerations​

While these options can provide relief, you shouldn't use these funds unless absolutely necessary. Every dollar you take out of your account today could impact your future. While loans may see like a good option, you're also losing time from your money to be able to compound and grow.

Additionally, these distributions must be carefully reported on your tax returns using IRS Form 8915-F. Employers may not always adopt these provisions, so individuals may need to classify the distributions themselves.

Affected individuals are encouraged to consult with tax professionals or financial advisors to understand the implications and make the best decisions for their circumstances.

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Editor: Colin Graves


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