Wednesday, November 21, 2012
Hurricane Sandy Hardship Withdrawals
(Despite a comment on my last post, this blog has not been "shut down", but blogging is rather slow. I make no apologies, I've been running around like I can't remember when. Nonetheless, hopefully I will get some posts up, especially a short and timely right now).
On Friday, November 16, the IRS put out a late Announcement 2012-44 regarding hardship withdrawals from 401(k), 403(b), and eligible 457(b) plans. Lest anyone be baffled by the alphabet soup, these are retirement plans for private industry and non-profit or governmental agencies. Each of these plans allow for loans and withdrawals under certain conditions and the announcement eases some of the requirements for documentation and other requirements for both businesses and victims. Those outside the disaster area but with a child, parent, grandparent, or dependent in a hardship area may also take loans or distributions with less red tape. Hardship withdrawals based on "unforeseeable emergency" for those is defined geographic areas can be made between now and February 1, 2013.
Lest anyone get too excited and run to withdraw money (with such a need for funds, it is easy to jump head first), let's just consider a few things:
*The IRS has not lifted the 10% penalty for early withdrawal. When the announcement came to my email box late Friday before candle lighting, I almost assumed it was easing the penalty as well as documentation requirements. I revisited the subject today and there will be a penalty to withdraw.
*Does that mean someone should not make a withdrawal? Well, not particularly. While I generally oppose dipping into a retirement funds and searching for other solutions to cash crunches, having seen photos of the terrible destruction and knowing how many families need to get back onto their feet and will need money to do so even with all of the wonderful chessed that is being done to alleviate the devastation, there are very good arguments for those have saved for retirement to dip into available funds despite the additional 10% penalty if that is the best solution after considering their big picture.
*Something to consider is the timing of the withdrawal(s) if you choose this route taking part of the withdrawal in 2012 and 2013. Remember that when you take money from a retirement plan such as a 401(k) before age 59 1/2, you owe tax at your highest marginal rate (federal and state/local) in addition to the 10% penalty. It might make sense to consider withdrawing some for this year and some next year.
Remember to consult someone for professional advice before making this decision. This blog post is informational, not authoritative.