IRS Announces More Relief for Louisiana Flood Victims…But Be Careful
A lot of people have retirement accounts, which is always a smart thing to have. Most people also know that if they decide to withdraw funds early or take out a loan from 401k plans and IRA accounts they have to pay a penalty. However, in certain situations these can still be very tempting options, especially for someone who finds him or herself in very difficult circumstances. Such is the case for many of the victims of the latest round of Louisiana flooding. No doubt everyone affected by the serious floods, and all the damage that comes with them, is looking for ways to clean up, rebuild and start over. The problem for many is that they just don’t have the disposable income necessary to overcome the hardships they are facing.
Rebuild With a Retirement Account
That’s where retirement plans come in. The IRS announced on Tuesday that many of the victims of the Louisiana flooding, as well as their family members will now be allowed to take out hardship distributions and loans from their individual retirement plans, such as a 401k. However, at this point there is a catch, and it’s a big one. That’s because unless the IRS changes its course, those who take out a loan or a hardship distribution will still be subject to the regular taxes and early withdrawal penalties. While, U.S. senator Bill Cassidy has said he will push the IRS to wave those penalties, as of now, they still apply. That means for some of the flooding victims it’s a choice between cleaning up and giving up.
Consider All Your Options
Many of those who have lost everything don’t have any other money to try to cleanup and rebuild, which means using their retirement funds is the only option have. However, with the possibility of stiff penalties and hefty taxes, that makes the decision that much more difficult. According to some experts, people should strongly consider looking for funds from other sources like low-interest Small Business Administration loans and bank loans, and only use their retirement account as a last resort. Otherwise, they could be risking their long-term financial security. While victims must have enough money to take care of their immediate living expenses, they should be very careful about taking out large portions of their retirement savings to clean up and rebuild. One expert noted that many victims might be eligible for both insurance funds as well as federal recovery funds, which is another reason it’s best to wait before cashing out your 401k.
Family Members Can Help Too
Meanwhile, the IRS has stated that people who lived or worked in the affected areas are eligible for the program. The agency also announced that family members who live outside of the areas could also take out a loan or hardship distributions to help loved ones located in the affected areas. According to its official statement, the IRS stated that: “Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by Jan. 17, 2017.”
Cutting Through the Red Tape
In addition, the IRS also announced that it would ease up on the many administrative and procedural rules typically associated with retirement plan loans and hardship distributions. That means eligible retirement plan participants will not have to worry about dealing with so much red tape and instead be able to gain access to their money with greater ease and in less time. The bottom line is these options offered by the IRS could be beneficial to many of the victims. However, anyone considering this route needs to look at all his or her options and weigh the pros and cons carefully.