Facing a natural disaster? Learn how a qualified disaster recovery distribution can help you access your retirement funds penalty-free!
If you have been affected by Hurricane Helene, Hurricane Milton, or another recent federally declared major disaster, you may be relieved to hear that over the past few years, it has become easier to access your work-based retirement plan and IRA money.
This post is a brief summary of the rules for qualified disaster recovery distributions and disaster-related plan loans.
FAQs
Q1: What is a qualified disaster recovery distribution?
A1: A qualified disaster recovery distribution allows individuals affected by federally declared disasters to withdraw up to $22,000 from their retirement accounts without the usual 10% early-withdrawal penalty.
Q2: Who is eligible for a qualified disaster recovery distribution?
A2: Individuals whose primary residence is in a federally declared disaster area and who have suffered economic losses due to the disaster are eligible.
Q3: Are there tax implications for taking a qualified disaster recovery distribution?
A3: Yes, while the early withdrawal penalty is waived, ordinary income taxes apply. However, the tax burden can be spread over three years.
Q4: Can I repay the amount withdrawn from my retirement account?
A4: Yes, individuals can repay the distributed amount within three years to any eligible retirement plan, potentially avoiding or reducing tax obligations.
Introduction To Penalty-Free Distributions
Since 2019, many work-based plan participants affected by disasters have had the option to take a hardship withdrawal from their plan accounts to help recover from qualified losses.
Generally, hardship withdrawals are subject to a 10% early-distribution penalty for those younger than 59½, as well as ordinary income taxes.
New Option Under The SECURE 2.0 Act
In 2022, the SECURE 2.0 Act ushered in a new provision allowing retirement savers to take qualified disaster recovery distributions of up to $22,000 in total, penalty-free, from their retirement accounts.
Plans include (but are not limited to) 401(k) plans, 403(b) plans, 457(b) plans, and, unlike hardship withdrawals, IRAs.
The distribution must be requested within 180 days of the disaster or declaration, whichever is later.
Although ordinary income taxes still apply to qualified disaster recovery distributions, account holders may spread the income, and therefore the tax obligation, over three years.1
Moreover, account holders have the option of repaying the amount distributed, in whole or in part, to any eligible retirement plan within three years, thereby avoiding or reducing the tax hit.2
If a work-sponsored plan does not accept rollovers, it is not required to accept repayments
Who Qualifies For Disaster Recovery Distributions?
An individual is qualified for a disaster recovery distribution if their primary residence is in the disaster area and the individual has suffered a disaster-related economic loss.
Examples of economic loss 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
This is not a comprehensive list; other losses may also qualify
Although work-based plans are not required to offer qualified disaster recovery distributions, an individual may treat a distribution as such on his or her tax returns.
Qualified disaster recovery distributions are reported on Form 8915-F
Loan from Work-Based Plan
Rather than taking a distribution and having to report it as taxable income, work-based plan participants (but not IRA account owners) may also be able to borrow from their plan accounts.
Typically, plan loans are limited to:
(1) the greater of 50% of the participant's vested account balance or $10,000, or
(2) $50,000, whichever is less.
In addition, loans generally need to be repaid within five years.
However, with respect to a qualified disaster, employers may raise the loan limit to as much as the full amount of the participant's balance or $100,000, whichever is less (minus the amount of any outstanding loans).
Employers may also extend the period for any outstanding loan payments due in the 180 days following a disaster for up to one year; the overall repayment period will adjust accordingly.
Employers are not required to offer plan loans or modify plan provisions due to a disaster
Additional Resources
For more information on qualified disaster recovery distributions and disaster loans, please speak with your IRA or retirement plan administrator, and consider seeking the guidance of a qualified tax professional
For more information about disaster assistance available from the IRS, visit www.irs.gov/newsroom/tax-relief-in-disaster-situations.
For information specific to Hurricanes Helene and Milton, visit www.usa.gov/disasters-and-emergencies.
For general information about disaster financial assistance available from the federal government, visit www.usa.gov/disaster-financial-help.
Accessing your retirement plan money after a disaster has become more straightforward thanks to recent legislative changes. Whether through penalty-free distributions or increased loan limits, these options provide financial relief during challenging times.
1) Alternatively, an individual may elect to report the entire distribution in the year it is made.
2) Taxpayers may file an amended tax return for taxes previously paid on the distribution(s).
It’s crucial to consult with your plan administrator and possibly a tax professional to understand your options fully and make informed decisions.