People are still in shock. Some are dealing with property still underwater. All are worrying about how they'll recover.
The federal government, through the Federal Emergency Management Agency and Small Business Administration, is offering relief programs. Some folks are looking at claiming storm disaster losses on their tax returns.
But government help won't cover everything, meaning most who were Ian's paths will need to come up with out-of-pocket money. Even the insured have deductibles to meet. And daily living expenses as they sort through what's left must be met.
That's why some storm victims who have some sort of retirement savings plan are considering, or have already tapped, those accounts.
Age and cost of taking retirement money: The money that's been in tax-deferred workplace retirement plans or individual retirement arrangements (IRAs) is handy when you need cash, but taking it could have some tax ramifications.
Traditional IRAs and 401(k) plans are tax deferred, and Uncle Sam has some rules to encourage people to leave those amounts untouched so they'll be around at retirement.
If you take money out of these or similar accounts before you reach age 59½, you'll owe tax on the withdrawn amount. Plus, in most cases, you'll also owe a 10 percent penalty on the amount you take out early.
However, there are a few early withdrawal circumstances where the penalty is waived.
Hardship withdrawals are OK: The Internal Revenue Service says you can tap your retirement account before your nearly-60 birthday without penalty if you need the money to deal with certain economic hardships.
So just what does Uncle Sam consider a hardship situation? Generally, it's circumstances where the funds are necessary to meet account owner's "immediate and heavy financial need."
That then brings us to the next question. What designates a situation as immediate and heavy? The IRS falls back on a frequently used answer: It depends on the individual's facts and circumstances.
However, the agency does have a few guidelines as to when certain expenses are deemed to be immediate and heavy hardships. They include things like —
- Unreimbursed medical expenses that exceed more than 7.5 percent of your adjusted gross income (AGI);
- Qualified higher education expenses;
- Purchase of your first home as long as the amount needed doesn't exceed $10,000; and
- Certain expenses if you're a qualified military reservist called to active duty; and
- Costs of recovery in connection with a major natural disaster.
Again, in making the final determination of whether your early retirement distribution is penalty free, the IRS takes your personal and financial facts and circumstances into account.
Remember, too, that you cannot repay hardship distributions to your plan or roll the money into another plan or an IRA. When you take it out, even for an extraordinary and legitimate situation, you must deal with the tax implications.
The IRS also has a chart you can use as a guideline as to when some early distributions from various retirement plans are penalty-free.
Penalty free, but not tax free: When devastating storms like Hurricane Ian, and Hurricane Fiona which preceded it, strike, the facts and circumstances of those in the storm paths are evident.
Such catastrophes were added to the official plan distribution no-penalty list to help eliminate any delay or uncertainty concerning access to retirement funds following a federally designated major disaster.
This hardship addition will help you escape the 10 percent penalty, but if you're taking money out of a traditional, tax-deferred account, you can't totally avoid the IRS.
Whenever you withdraw money that has yet to be taxed, be it your — and in the case of a workplace plan, your employer's matching — contributions or tax-free earnings, those amounts are subject to tax.
It doesn't matter if you are taking the money out to meet emergency needs, or are making a withdrawal as a retiree to cover your usual living expenses. When you take out the untaxed funds, you owe tax on them for that tax year.
Regular tax rates apply: Note, too, that these amounts are taxed at ordinary income tax rates. That could be as high as 37 percent, depending on your income tax bracket.
Some folks mistakenly think that since their retirement money is in, for example, an investment fund, the withdrawals will be taxed at the usually lower capital gains tax rates. That's zero tax for some, 15 percent for most, and 20 percent for higher earners.
Sorry, no. All traditional, tax-deferred retirement fund distributions regardless of what type of account they are in — bank savings, a CD, investment vehicle, or under the mattress — are taxed at ordinary rates.
Roth distribution differences: If, however, you're tapping a Roth IRA or workplace retirement account, the withdrawal and tax rules are different.
With Roths, the U.S. Treasury already got its cut. You paid taxes on that account money before you put it into the retirement plan.
As long as you've had the Roth account for more than five years, you won't owe any penalty on the early withdrawals of earnings.
And you always can tap your already-taxed contributions at any time, without any penalty or tax-due consequences.
Workplace plan loans instead: Rather than withdraw the money, you might consider taking a hardship loan against your workplace retirement account.
Generally, a workplace retirement plan participant may borrow up to 50 percent of the vested account balance or $50,000, whichever is less. An exception to this limit is if 50 percent of the vested account balance is less than $10,000. In these cases, the plan borrowing limit is $10,000.
The retirement account loan amount is not taxed as long as the arrangement meets the company's IRS approved rules. One of the rules is a repayment plan that the borrower must follow.
Like all loans, you will have to pay interest on the loan. And if you don't repay per the loan's terms, you could end up owing taxes.
When a workplace retirement plan loan goes into default per its repayment terms, the loan's outstanding balance is treated as a taxable distribution. As with all loans, make sure you understand what could send you into a default situation.
The type of plan your workplace offers determines whether a loan is allowed. Profit-sharing, money purchase, 401(k), 403(b), and 457(b) plans may offer loans. Workplace plans based on IRAs (SEP, SIMPLE IRA) do not offer loans.
Also, note that even if a retirement plan loan is allowed by law, your employer might not offer them. It's just an option, not a plan requirement.
Should you use retirement money? Financial advisers say withdrawals from retirement accounts should be a last resort.
That's generally good advice. You want to let your retirement money grow untouched for as long as possible to ensure you can enjoy the type of post-work years you want.
But real life too often doesn't follow rules, financial or otherwise.
If your personal circumstances mean that you must take out some retirement funds to make it through disaster and subsequent rebuilding, or any other hardship situation, then do so.
Just make sure you know the ultimate consequences for your financial future, as well as the immediate penalty and income tax ramifications of retirement account loans or early distributions.
You also might find these items of interest:
- 5 things to know about workplace retirement plan hardship withdrawals
- Tapping retirement accounts early is a dangerous trend among young savers
- Texas' top tax writer wants to make it less costly for hurricane victims to tap retirement accounts