The IRS is providing Hurricane Harvey victims with heavy damage and emergency expenses an unconventional way to get financial relief by making it easier to access retirement savings.
However, storm victims should think twice before taking hardship distributions from 401(k) and other retirement plans unless absolutely necessary.
This week, the IRS waived rules restricting victims of Hurricane Harvey from getting access to employee-sponsored retirement funds. The IRS previously provided the same type of relief to victims of Hurricane Sandy and Hurricane Katrina.
The IRS is temporarily loosening rules on retirement plan hardship withdrawals or loans for citizens living in certain areas hit hardest by the storm.
For some storm victims, retirement savings may be the only funds they have set aside that can help them navigate the next several months. The Consumer Federation of America estimates that only about 20 percent of storm victims in the Houston area owned flood insurance.
For victims without savings and flood insurance, the $5,000 average Federal Emergency Management Agency aid payout may not cover food and safe shelter in the coming months. But experts advise victims not to dip into retirement accounts unless absolutely necessary.
“Think very carefully before making an early withdrawal from a retirement account,” Bankrate.com analyst Greg McBride says, according to USA Today. “Even for permissible reasons, this deals a permanent setback to your retirement planning.”
Withdrawing from a retirement account should be a last resort, McBride says. For victims without any emergency savings, he suggests exploring credit cards with 0 percent introductory periods.
Qualified retirement plans are authorized to lend 50 percent of their current balance up to a maximum of $50,000. Hardship withdrawals from retirement accounts will still be subject to the standard 10 percent early withdrawal fee, the IRS says.
Loans borrowed from retirement accounts must typically be…
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