We are continuing to pray for those affected by Hurricane Helene and are shocked and saddened by the images and accounts being shared in the news. We’re praying for those affected, some of whom are clients and plan participants. Disasters leave a huge emotional burden and also a financial burden for those who sustained injuries or lost or had damage to their home, vehicles, or other property.

When a natural disaster strikes, like the recent hurricane and flash floods, the IRS offers relief to people living in areas that have been declared federal disaster zones. In fact, the Secure Act 2.0 expanded access to this relief. One way they help is by allowing you to take money from your retirement plan to cover disaster-related expenses without the usual penalties. We hope you are not in this situation but here’s what you need to know if you’re considering this option.

Who Can Use This Relief?

To qualify, your principal residence must in an area that has been declared a disaster zone by the President and in the impacted date range. If you’re not sure, FEMA maintains a directory where you can search for Major Disaster Declarations. The money you take out must be used for expenses related to the disaster, like home repairs, medical costs, or to make up for lost income. For more details on eligibility, you can visit the IRS Disaster Relief FAQ page.

What Retirement Plans Are Eligible?

You can take these distributions from certain retirement plans, including 401(k)s, 403(b)s, 457(b)s, and IRAs. However, not all employers may offer this option as the plan document will specify whether qualified disaster relief distributions are allowed, so you’ll want to check with your plan administrator. However, even if the employer does not treat a distribution as a disaster relief distribution, the employee can still claim it as such on their tax return by filing Form 8915-F.

What About Taxes and Penalties?

Normally, if you take money out of your retirement plan early, you have to pay a 10% penalty. But for disaster relief, the IRS waives this penalty on a maximum amount of $22,000 from all plans and IRAs of an individual which can be treated as a qualified disaster recovery distribution. However, the distribution is still subject to income tax.

In the income tax side, the good news is that you can choose to spread the income tax over three years instead of paying it all at once. This can make it easier to manage your tax liability.

Can You Repay the Money?

Generally, you have up to three years from the distribution date to repay all or part of the money you took out. If you repay it within that time, it’s treated as a trustee-to-trustee transfer, meaning you won’t owe any tax.

How to Report It on Your Taxes

You’ll need to file IRS Form 8915 when you complete your taxes. If you choose to spread the income tax over three years, you’ll need to submit this form each year. The IRS provides instructions on filling out this form.

Things to Consider Before Taking a Distribution

Before withdrawing money from your retirement plan, think carefully about how it may affect your future savings. Selling and withdrawing investment funds from a tax-advantaged investment account is not a decision to be taken lightly as it might impact your financial future. These distributions are designed to help with immediate, necessary disaster-related expenses, so it’s important to weigh the pros and cons and assess whether the need can be met in other ways such as through an insurance payout. Be sure to consult with a tax professional to ensure you’re making the right choice for your situation.

Taking a retirement plan distribution for disaster relief can provide crucial help when facing unexpected costs due to a natural disaster. To explore your options in more detail, check out the IRS resources mentioned above or reach out to a tax professional for guidance.

If you are impacted by the recent disasters, know that our team is praying for you!

This article is meant as information only and is not tax advice. Beacon Wealth Consultants does not provide tax or legal advice.  Contact your tax or legal professional to discuss how this might impact you.