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Louisiana flood victims can tap retirement accounts

A workplace retirement plan, where, in most cases, employees automatically put in some pre-tax money each pay period, is the largest -- or only -- savings many folks have.

Flooding in Port Vincent Lousiana August 2016 as photographed by NOAA aviators
Louisiana flood victims can now access their retirement money more easily to help with their recovery efforts in flooded areas, like Port Vincent shown in this National Oceanic and Atmospheric Administration (NOAA) photo. Click the image to see more NOAA aerial before-and-after shots of Louisiana flood areas.

And as the name indicates, retirement plans are for your post-work years.

Sometimes, though, you need that money before you leave the workforce.

In cases of such need -- and we're talking a real necessity, not just a want -- you can tap your retirement account early.

That option is now available to Louisiana residents working to recover from the historic August floods in that state. This move follows earlier IRS action to provide tax filing relief to affected Pelican State residents.

Even better, the IRS says it is cutting some of the red tape so that eligible retirement plan participants will be able to access their money more quickly and use it to get their post-flood lives back on track.

But the relief in this case is not unlimited.

Variety of plans affected: The IRS announced on Tuesday, Aug. 30, that companies with 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to Louisiana flood victims and members of their families.

"This hardship waiver will be critical for helping Louisianans get back on their feet quickly," said Sen. Bill Cassidy (R-La.), who earlier this month wrote the Treasury and Labor Departments, as well as the IRS, seeking easing of retirement plan access for his constituents. "As so many of those affected in this area did not have flood insurance, every tool possible needs to be implemented to allow them access to much needed emergency funds."

The streamlined loan procedures and liberalized hardship distribution rules, says the IRS, also are available to folks with retirement plans similar to 401(k) plans. This covers public school and tax-exempt organization employees with 403(b) tax-sheltered annuities and state and local government employees with 457(b) deferred-compensation plans.

And while IRA owners cannot take out loans from those accounts, they, too, may be eligible to receive distributions under liberalized procedures.

Wide distribution details: This broad-based relief means that a retirement plan can allow a Louisiana flood victim to take a hardship distribution or borrow up to the specified statutory limits from his or her plan.

Generally, the hardship distribution limit cannot be more than the employee's total elective contributions, including designated Roth contributions, as of the date of distribution. Other amounts under the plan, such as regular matching contributions and discretionary profit-sharing contributions, also may be distributed on account of hardship if the plan so provides.

Folks who live outside the specific disaster area also can take out a retirement plan loan or hardship distribution and use it to help immediate family members (son, daughter, parent, grandparent or other dependent) who lived or worked in the disaster area.

In addition, says the IRS, the reasons that normally apply to hardship distributions are waived here. This means, for example, the plan money can be used for food and shelter.

And if a company retirement plan requires certain documentation before a distribution is made, the plan can relax this requirement.

Some limits remain: The ability to access retirement money isn't available forever. Affected Louisiana residents have until Jan. 17, 2017, to take advantage of the hardship plan distribution waiver.

That gives flood victims time to thoroughly assess their damages and explore other options to meet their recovery needs.

And some usual hardship and loan rules still apply.

When you take a loan from your retirement plan, the amount is tax-free as long as you pay it back within five or less year.

But in hardship distribution cases, the money taken out here is still taxable.

And if you are younger than 59½ then the early withdrawal penalty of 10 percent of the distribution still applies.

Cassidy's office said the senator will be pushing for a waiver of the penalties.

Loans and hardship withdrawals from retirement plans should be a last resort. But in some cases, folks are convinced that it is their only choice. At least in these cases, the IRS decision will help facilitate those folks' ability to get the money they need to rebuild.

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