The IRS recently announced individuals effected by Hurricane Harvey will be allowed to remove money from their 401(k) plan under the hardship provision to help pay for any damages suffered. The distribution must occur before January 31, 2018.[1]
The IRS allows for several safe Harbor distributions including the following expenses:[2]
- Medical expenses.
- Purchase of your principal home, not including mortgage payments.
- Tuition, fees, room and board.
- Payments to avoid eviction from your home.
- Funeral expenses.
- Damage to your home.
Your distribution will be limited to the amount of money you need to satisfy the expense. For example, if your 401(k) balance is $250,000 and the cost of the repair is $100,000, you’ll be allowed to remove $100,000. Your distribution will also be limited to your elective deferrals so to remove $100,000 from your plan your personal contributions must exceed $100,000. If you qualify for a hardship withdrawal, you’re not allowed to put the money back into your 401(k) or roll the money into your IRA. In addition, you may be restricted from contributing to your 401(k) for six months following the distribution.[3]
This distribution will be a taxable event and you may incur a 10% penalty if you’re under the age of 59 1/2. You’ll receive a 1099-R for your hardship distribution which is reported to the IRS.
If you need a hardship withdrawal, please discuss it with your plan administrator and refer to your summary plan description. I’d also recommend getting tax advice from your CPA.
Rather than a hardship withdrawal, you may be better served with a loan from your 401(k) if your repair is $50,000 or less. The loan will allow you to contribute to your plan and the distribution isn’t considered a taxable event if it’s paid back within five years. The amount of your loan will be capped at $50,000 or one half of your vested balance. If your vested balance is $40,000, you’ll be allowed to receive a loan for $20,000.
As always, please seek help and guidance when you remove money from your company sponsored retirement plan.
I will say of the Lord, “He is my refuge and my fortress, my God, in whom I trust.” ~ Psalm 91:2.
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. For more information on financial planning and investment management, please visit www.parrottwealth.com.
August 31, 2017
[1] https://www.cnbc.com/2017/08/31/irs-makes-it-easier-for-harvey-victims-to-tap-401k-money-for-rebuilding.html, Sarah O’Brian, CNBC, 8/31/2017.
[2] https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans, accessed 8/31/2017.
[3] Ibid.