Hurricane Harvey IRS Exemption for Retirement Plan Withdrawals

Discussion in 'Retirement Planning Forum' started by scagnt83, Sep 1, 2017.

  1. scagnt83
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    The IRS has granted an exemption to those affected by the recent hurricane and flooding.

    They are allowed to take penalty free Hardship Withdrawals from their 401k / 403b / IRA/ etc. regardless of age.

    The cumbersome procedure for this is being relaxed as well.

    The rules and procedures for Loans are being loosened too.

    Here is the IRS announcement:
    https://www.irs.gov/newsroom/retire...-distributions-to-victims-of-hurricane-harvey

    If you know anyone affected by the storm please let them know about this.
     
  2. DHK
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    This reminds me of Atlas Shrugged when the trains crashed in the tunnel after the passing of Directive 10-289:

    "To expedite this crises, we will grant you an exemption from directive 10-289 to help you." - Wesley Mouch

    "Why don't you just get out of my way and let me do my job." - Dagny Taggart

    "I knew we could count on you."

    That's what happens when you have regulated retirement plans. You get to have "special permission" to access your money in the event of a crises.

    /end rant
     
  3. adjusterjack
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    With tax benefits comes inevitable regulation.

    Or, you can keep all of your money in your checking account at .01% interest and you won't need anybody's "special permission" to access your money in the event of a crisis.
     
  4. scagnt83
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  5. entrep1776
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    My sister is in that area.
    But....

    The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax.
     
  6. DHK
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    Try getting CASH in the event of a crisis from your bank, or amounts over $10,000 in cash at ANYTIME. (And I don't mean due to CTR/SAR reporting requirements.) I was a banker on 9/11... and that day and a couple more, we restricted cash withdrawals to about $3k per customer in order to ensure that we could serve more of our 'panicked' customers.

    Aside from cash withdrawal issues, having money in the bank is best for liquidity and accessibility. But 2nd best can be a life insurance policy - because you don't have to ask for IRS exemptions or permission to access it at any time.

    And then, when things are bad, it looks like "government is here to help you" by letting you access your IRS restricted retirement savings plan because of an emergency (or avoid taking out a required minimum distribution because Nancy Pelosi feels sorry for the American People and blamed the Bush administration for the 2008 crash).

    I'm not saying that 401(k) plans are bad. I'm simply saying that I would recommend diversifying your savings so you can have liquidity when you need it - regardless of "government permission".
     
  7. scagnt83
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    Neither my post or the link provided suggested any change to taxation on Distributions.

    The change is in:
    - What qualifies as a Hardship
    - Requiring Loans before Hardship Withdrawals
    - Not allowing Contributions for 6 months after taking a Hardship Withdrawal
    - Streamlined the paperwork process and required documents for Hardships and Loans
    - 401k Plans that do not allow Hardship Withdrawals or Loans, can amend the Plan midyear. And can start making those payments immediately, before the amendments are officially filed


    This is obviously not going to make things "OK" for a person. But every little bit helps.
    And not requiring the Loan before hand (and paying the interest on them), and allowing the person to continue Contributions after the Hardship Withdrawal, will certainly help people out to some extent.


    https://www.irs.gov/newsroom/retire...-distributions-to-victims-of-hurricane-harvey
     
    Last edited: Sep 3, 2017
  8. entrep1776
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    Giving flood victims easy access to their money I think will most likely be VERY BAD & make problem worse.

    I was hoping the government would let people pull the money with no taxes & no penalties.

    Here's the scenario, my old CPA told me this. My CPA told me never take a loan against a retirement plan. #1 reason people have lots of financial difficulties & end up owing the IRS.

    Everyone has good intentions of paying back the loan & then life gets in the way another hurricane hits the factory never reopens after Harvey etc. etc.. Then no income coming in & owe IRS 10% penalty & distribution counted as income.

    ...... lots of links out there why this is a bad idea. here's one link:
    .................
    Read more: 8 Reasons To Never Borrow From Your 401(k) 8 Reasons To Never Borrow From Your 401(k)

    4. If Your Financial Situation Deteriorates, You Could Lose Even More Money

    Should you find yourself in a position where you are unable to repay the loan, it is treated as a withdrawal and the outstanding loan balance will be subject to current income taxes in addition to a 10% early withdrawal penalty if you are under age 59½. (For more on this, read Tough Times … Should You Dip into Your Qualified Plan?.)

    However, there are several exceptions to the early withdrawal penalty, such as the post-55 exception. (For more on this, check out the IRS page on this topic.)

    5. You Are Trapped

    If you have an outstanding loan, most plans require that the loan be immediately repaid if you quit your job. "If you cannot repay the loan 60 days after losing your job, it will become fully taxable and may be subject to a 10% early withdrawal penalty," says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla.

    That means as long as you have a loan you are stuck in your current job and may be forced to pass up a better opportunity should one come along. Or, you can take the loan balance as a withdrawal and pay the 10% penalty, which further compounds the growth opportunities that you have missed by taking the loan.
    .............
     
  9. scagnt83
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    The downsides of 401k Loans are the exact reason they changed the rules for Hardship Withdrawals.

    And when you just lost every personal possession in your life... the normal financial "rules" of what to do and not to do, fly out the window.

    Those who lost their homes could care less about 2nd hand advice from some CPA. In a perfect world, a person would never need a Hardship Withdrawal or 401k Loan... but this is not a perfect world and all situations are different. Any financial professional who speaks in definitives lacks real world experience.

    Generaly speaking, a 401k Loan is a line of "last resort" for financial needs. Same with Hardship Withdrawals. But when you just lost your home and possessions, you have to do what you have to do to survive. You are in a "last resort" situation.

    I agree the IRS should waive the early withdrawal penalty. But keep in mind these are the exact same exceptions made for prior major natural disasters.

    ------------

    Instead of complaining about what the IRS should or shouldnt do... or what individuals should or shouldnt do with their own money during the most desperate time of their lives.... perhaps positivity and compassion might be a better use of energy for those of us not affected by the floods.

    As an Advisor who provides 401k Plans to small businesses. I can say that situations like this are EXACTLY what Hardship Withdrawals and Loans were created for within 401k Plans.
     
    Last edited: Sep 3, 2017
  10. entrep1776
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    Would be horrible to lose my house. My sister was videoing the flooding around her house. Hers stayed dry.

    Wish there were some statistics on how taking 401k loans worked/didn't work out for past natural disaster survivors.

    I would think it would just make the struggle longer & more painful festering wound vs. ripping a band aid off a fairly nasty cut. Much easier to get immediate help from gov/red cross whoever as opposed to 4 months down road when everyone has forgot about Harvey.
     

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