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Withdrawing Money for Disasters


It's the season for tornadoes, hurricanes, flooding and devastating winds.  So, I thought it would be a good time to review the rules for taking money out of your retirement accounts to get you through the storms. 

The IRS has just released a new set of FAQs on the provisions that the SECURE Act 2.0 provides for relief of individuals impacted by federally declared disasters. The SECURE 2.0 Act allows for:

  • Distributions up to $22,000 from retirement plans and IRAs for individuals who sustained an economic loss because of a qualified disaster.
  • The ability to repay first-time homebuyer distributions or certain hardship distributions when a disaster prevents a taxpayer from buying or building a home.
  • Increased limits and longer repayment times for plan loans.

Prior to the SECURE 2.0 Act, qualified disaster treatment applied only to specific disasters or timeframes. Now, any major disaster declared by the President after Dec. 27, 2020, is a qualified disaster eligible for qualified disaster recovery distribution treatment and the other special provisions.

You can determine if a specific disaster qualifies by using FEMA’s disaster declaration search tool to filter for major disaster declarations. While other kinds of disasters, such as emergency declarations and fire management assistance do not qualify for the special provisions, emergency declarations are often followed by major disaster declarations. Also, major disaster declarations often (but do not necessarily) qualify for filing postponements and other IRS relief.

Let's break down the definitions: 

1) A qualified individual is an individual:

  • Whose principal residence is in the covered disaster area during the incident period, and
  • Who has sustained an economic loss on account of the disaster.

2) An incident period may be a single day or multiple days, depending on the type of disaster. Economic losses may include:

  • Damage or destruction to real or personal property directly caused by the disaster, such as from fire, flooding, wind, or other storm damage, or following the disaster such as from looting, vandalism, or theft.
  • Displacement from an individual’s home.
  • Loss of a job due to temporary or permanent layoffs.

3) Qualified disaster recovery distributions

A qualified disaster recovery distribution is a distribution up to $22,000 made to a qualified individual from an eligible retirement plan on or after the first day of the incident period of the qualified disaster and before the date that is 180 days after the latest of:

  • Dec. 29, 2022
  • The first day of the incident period
  • The date of the disaster declaration

Eligible retirement plans include employer plans, such as 401(k)s and 403(b)s, government plans, and IRAs. The $22,000 is the aggregate maximum distributed from one or more eligible plans.

Let's put this into practice.

Example 1: A major disaster is declared on May 4 for severe storms and flooding occurring April 26-April 28. A taxpayer’s principal residence is located in the covered disaster area and sustains damage because of the storms. Therefore, the taxpayer is a qualified individual and the disaster is a qualified disaster. The taxpayer may take a qualified disaster recovery distribution from an eligible plan or plans any time starting May 4 (the declaration date, which is the latest of the three dates) through Oct. 30 (the date before 180 days after the start date).

So, how does it help you?  Qualified disaster recovery distributions are not subject to the 10% additional tax on early distributions, regardless of the taxpayer’s age. You also have the option of being taxed in equal installments over three years (unless you elect to pay tax on the entire distribution in the first year). Also, you may repay all or part of the distribution any time within the three-year period beginning on the date you receive the distribution.

Example 2: Let's say that the taxpayer in Example 1 takes a $6,000 qualified disaster recovery distribution on June 1 to pay for repairs. If the taxpayer does not make any elections, $2,000 of the distribution will be taxed in the year the distribution was made and in each of the next two years. The taxpayer can repay all or part of the $6,000 any time over the three-year period starting June 1 of the current year. Taxation can be avoided altogether by repaying the entire distribution in the current year.

Qualified disaster recovery distributions and repayments if applicable are reported on Form 8915-F, Qualified Disaster Retirement Plan Distributions and Repayments with your personal tax return. 

Note: While employer plans are not required to adopt expanded disaster relief or accept repayments of qualified disaster recovery distributions, qualified taxpayers may treat distributions as qualified disaster recovery distributions and repay distributions to any other eligible plans.