The IRS has announced relief for victims of recent disasters. If you live in a federally-declared disaster area, you qualify for this program. As an affected taxpayer, you may take a loan or hardship distribution from your retirement plan.

Streamlined procedures have been put in place to allow taxpayers quick access to funds in these accounts. The plan must allow for hardship withdrawals. However, these distributions may be made prior to the plan being amended to allow such withdrawals.  Contact the human resources department at your company to see if your plan allows these loans or distributions. The IRS is waiving the six-month ban on distributions that normally affects taxpayers taking hardship distributions. Any distribution or loan under this announcement must be made by January 31, 2018.

It should be noted that the tax treatment of loans and distributions under this process remain unchanged. Loans may be taken from a 401(k), 403(b), or 457(b) plan that allows such withdrawals. The normal rules for loans apply, meaning that the loans are tax-free if they are repaid over a period of five years or less.  If you terminate your employment before a loan is paid off, it immediately becomes a distribution, subject to laws regarding taxation of distributions.

IRA’s do not allow loans but a hardship distribution may be taken. In addition, a hardship distribution may be taken from any of the above listed types of plans.  These distributions will be subject to regular income tax and the 10% penalty for early withdrawal unless another exception applies. So the main benefit to this program is to allow quicker access to the funds.

It should be noted that a taxpayer not living in an area affected by the hurricanes may take a loan or withdrawal to assist a son, daughter, parent, grandparent, or other dependent wo lives in an affected area.

Have a question? Contact John Stancil