Lawmakers may loosen 401k rules so storm victims can withdraw money

  • Roger Yu
  • USA TODAY
3:09 p.m Monday, Sept. 11, 2017 Homepage

Storm victims may be able to tap their 401k. 

Federal lawmakers are considering a proposal to allow victims of Tropical Storms Irma and Harvey to withdraw money from their retirement accounts to rebuild their homes and lives without incurring penalties.          

Rep. Kevin Brady (R-Texas) is one of several lawmakers considering introducing a bill that would tweak the current tax code to aid victims. "It will include tax provisions, some of which will help people access their retirement funds without penalty for rebuilding activities," he told reporters last Thursday.

"This won’t be boilerplate," said Brady, who's chairman of the House Ways and Means Committee. "We’re going to tailor these to our communities and their needs going forward."         

People who withdraw funds from retirement accounts before they turn 59 1/2 typically have to pay a 10 percent penalty, and other state and federal taxes.         

Brady's office confirmed Monday that no specific bill has yet been introduced and declined to reveal more details.  

Loosening tax rules on early retirement savings withdrawal is controversial because it can encourage people to use it as a means to fund bills and items that are better off paid for by other financial sources, some personal finance experts say.          

Brady's comments come days after retirement account lobbyists pitched a proposal to waive financial penalties for storm victims if they withdraw funds from their individual retirement accounts or work-sponsored 401(k) or 403(b) retirement saving accounts. 

Similar retirement account-related relief provisions were granted by the Internal Revenue Service and other federal agencies to the victims of Hurricanes Katrina, Sandy and Rita.         

After Harvey left much of Houston in ruins, the American Retirement Association's proposal asked Congress to consider loosening the limit on how much people can borrow on their retirement accounts.         

The maximum amount that qualified retirement plans can permit as a loan is (1) the greater of $10,000 or 50 percent of the invested balance, or (2) $50,000, whichever is less. Any change in the limit will require Congressional approval.          

The IRS announced in late August that 401k and other employer-sponsored retirement plan operators can now make loans and hardship distributions more easily to Harvey victims and their family members. IRA account holders aren't allowed to take loans from their IRA accounts but can withdraw funds with a penalty.          

If some employers hadn't previously offered the option of 401k loans to employees in the past, the IRS is now allowing them to make such loans quickly and amend their plans to reflect the change later, Nevin Adams, chief of marketing & communications for the American Retirement Association, said.          

The IRS bans employees who take out hardship distribution from contributing to their 401k plans for six months. But the agency also waived the rule for Harvey victims.

The IRS said hardship distributions would still incur the 10 percent penalty. 

The IRS has also granted an extension until Jan. 31, 2018, to Harvey victims in parts of Texas to file certain individual and business tax returns and make tax payments. The extension applies to those taxpayers who’ve filed for extensions that run out on Oct. 16 and businesses with extensions that expire on Sept. 15.         

Money in retirement accounts is considered "locked in" and grows over time with compounding interest. Once some funds are pulled, "you can never put that money back later," says Greg McBride, chief financial analyst at personal finance site Bankrate.com. "Think very carefully before making an early withdrawal from a retirement account."           

For many, tapping other funding sources first before retirement accounts may be a better option. Emergency savings and low cost borrowing — such as a zero percent introductory rate on credit cards or low-rate personal loans — should be considered, McBride says.         

Other taxable assets — CDs, bonds, stocks or securities held in a taxable brokerage account — also could be suitable options for those who have been diligent about saving.          

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