How To Access Retirement Savings Early and Penalty-Free For Disaster Relief | Global News Avenue

If you’ve been affected by a major disaster, such as the recent wildfires in California, you may be eligible to access your retirement funds early without paying any penalties.

below Security 2.0Under the Federal Retirement Act of 2022, individuals affected by a federally declared major disaster can withdraw up to $22,000 from their retirement accounts, such as 401(k)s and individual retirement accounts (IRAs), without paying the 10% Early withdrawal penalty. The disaster relief rules also allow taxpayers three years to repay distributions from their IRA or workplace retirement plan.

“They’re called qualified disaster recovery distributions, and they’re kind of a last resort for people who are going through extremely difficult times,” said Scott Sturgeon, CFP and founder of Oread Wealth.

How to use your 401(k) for disaster relief

in a Latest tax tipsThe IRS reminds taxpayers that they may be eligible for disaster relief if they live in a federally declared disaster area or have suffered financial losses due to the disaster, such as displacement or property damage. On January 8, the Federal Emergency Management Agency (FEMA) declared the California wildfires a major disaster.

Disaster relief provisions under the new law also provide greater flexibility for those who want to borrow from them. 401(k)s For some homebuyers who are dipping into their retirement accounts early and planning to purchase a home affected by a major disaster.

Those taken out 401(k) Loans After a major disaster, one can borrow up to the full vested amount in their plan (but less than $100,000) and defer certain workplace retirement plan loan repayments for up to one year. Typically, people can only take out a 401(k) loan up to 50% of their vested account balance or $50,000, whichever is lower.

Additionally, those participating for the first time Home Buyer IRA Distribution Or you took money from your 401(k) early to buy or build a home, were unable to do so, and now can pay back that distribution.

Obtaining funds may require some bookkeeping

Employers may elect to adopt the disaster relief provisions, but individual taxpayers may also take advantage of qualified disaster recovery distributions on their own.

“If you have a retirement plan that allows you to do that, they should provide (you) with some help. If they don’t, you can still do it yourself, but it’s a matter of keeping track of all this (information),” Sturgeon explain. “I recommend hiring or working with a tax professional who can help you with the filing you need to do.”

About 8% of employers surveyed by Retirement Record Keeper Alight before the wildfires said they had adopted the $22,000 disaster withdrawal amount, while 22% said they “definitely” would or “probably” Increase this amount. Of those employers who would “definitely” or “probably” increase this provision, more than half said they planned to do so in 2025. One in 20 employers said they have adopted higher 401(k) disaster loan amounts.

What to know before tapping your retirement funds

Facing a major disaster is a huge challenge, and while the rules make it easier to access retirement funds to help you in your time of need, Sturgeon advises people to consider other options for immediate liquidity, such as excess cash or investing in taxable funds brokerage accountfirst.

That’s because when you withdraw funds from a retirement account and deposit them back later, you lose the tax-deferred growth on those funds, which can impact your long-term retirement savings goals.

Additionally, if you are unable to repay the distribution, you will owe taxes.

“If you don’t pay the 10 per cent penalty, that’s fine, but if you don’t pay it back again and again, you might still be paying income tax and losing out on long-term growth,” Sturgeon said.

Money you withdraw but don’t get back will be considered taxable income, and you can include it in your income in equal installments over three years.