Millions of Americans were affected by Hurricanes Harvey, Irma, and Maria. You may be one of them. If you are, there is some encouraging news. On September 29, President Trump signed H.R. 3823, the “Disaster Tax Relief and Airport and Airway Extension Act of 2017” into law. The new law provides a package of tax relief for Hurricane victims, including a provision that allows penalty-free distributions from retirement accounts.
Can you benefit from the new relief? Well, here is how the rules work. Distributions taken from retirement plans are generally subject to a 10% early distribution penalty unless an exception applies. Congress has now created a temporary exception to the penalty for “qualified hurricane distributions.” The exception applies to both IRAs and employer plans and will end on December 31, 2018.
You will be eligible to take a qualified hurricane distribution if your principal place of abode is in a hurricane disaster area and you have sustained an economic loss caused by the hurricane. If you have not sustained an economic loss, you will not qualify for tax relief under this legislation. Unsure about whether you live in a hurricane disaster area? For a complete list of hurricane disaster areas, visit https://www.fema.gov/disasters.
The distribution must be:
· Made on or after August 23, 2017, and before January 1, 2019, to an individual living in the Hurricane Harvey disaster area
· Made on or after September 4, 2017, and before January 1, 2019, to an individual living in the Hurricane Irma disaster area
· Made on or after September 16, 2017, and before January 1, 2019, to an individual living in the Hurricane Maria disaster area
The maximum amount that you can take from all your retirement plans combined is $100,000 as a qualified hurricane distribution. You and your spouse can each take $100,000 from your own retirement plans. There are no restrictions on how the distributed funds are used and the law does not specifically limit the amount of the distribution to the amount of the damage caused by the hurricane. If you live outside of the disaster area but have a business, work for an employer, or have family members inside the disaster area, you may not take qualified hurricane distributions.
Remember, even though a qualified hurricane distribution gets you out of the early distribution penalty, you will still have to pay income tax on any pre-tax funds you withdraw. To ease the pain, Congress has included a provision that allows you to include the income on your tax return ratably over a three-year period beginning with the year of the distribution. You can also elect to include the total amount in income for the year of the distribution.
What if your situation improves and you no longer need the funds you took as a qualified hurricane distribution? There is good news for you. You can repay a qualified hurricane distribution within three years to a retirement account tax-free. The three-year period will begin on the day after the date you receive the funds. The repayments can be made to any retirement plan to which you could have rolled over the original distribution. If you already paid income tax on your qualified hurricane distribution and then later repay the funds to your retirement plan, you will be able to file an amended tax return to recover the taxes that you paid.