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Irma victims can now tap their 401(k) funds for cash

  • Hardship withdrawals from 401(k)s still come with 10 percent penalty plus taxation, but it may be better to tap the accounts than to wait for government disaster aid, some financial planners say.
  • Taking a loan against your account can make more sense than making a withdrawal.

Those affected by Hurricane Irma are now permitted to tap their 401(k) plans if they need cash.

The Internal Revenue Service, which often offers varying forms of tax relief in the wake of disasters, is allowing storm victims to take loans against their 401(k) accounts or make hardship withdrawals.

Although the federal government usually makes low-interest loans and grants available to disaster victims, applicants can often wait for months to receive the money, which does little to address immediate cash needs.

While taking money from your retirement savings is typically a no-no, "if you're someone whose world just got turned upside down financially and otherwise, you're playing by different rules," said Kathryn Hauer, a certified financial planner with Wilson David Investment Advisors in Aiken, South Carolina.

Cars make their away through a flooded street the morning after Hurricane Irma swept through the area on September 11, 2017 in Bonita Springs, Florida.
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Cars make their away through a flooded street the morning after Hurricane Irma swept through the area on September 11, 2017 in Bonita Springs, Florida.

The IRS said the relief applies to 401(k) plan participants if they or family members have been affected by the flooding and destruction left by the storm.

This means that even if you live outside a disaster area, you can tap your own 401(k) to assist family members in the affected area. The normal 10 percent early withdrawal penalty for those under age 59½ (with a few exceptions) will still apply and you'll owe income taxes on the money as well. (Some congressional lawmakers are exploring the idea of eliminating that penalty.)

"If you're someone whose world just got turned upside down financially and otherwise, you're playing by different rules." -Kathryn Hauer, certified financial planner

Although hardship distributions typically come with a six-month ban on new contributions to your retirement account, the IRS is waiving that restriction. Distributions must be made by Jan. 31, the agency said.

Loans generally come with no tax implications if they are repaid within five years. However, as with early withdrawals, loans remove money from investments intended to grow and provide income to you in retirement.

The IRS also said it is relaxing certain administrative rules to let people access their 401(k) funds "with a minimum of red tape."

Hauer said taking a loan typically is a better option than a hardship withdrawal, especially if you anticipate receiving a loan or grant in a few months to help rebuild.

"You pay some interest, but you're not paying taxes and a penalty on the money," she said.