Don't Mess With Taxes

Instead of my usual weekend watching of sports, I’m glued to the Weather Channel. There’s a dangerous and already deadly tornado outbreak rumbling across the south this afternoon.

This year is turning out to be awful as far as severe weather and other disasters. We had Southern California’s wildfires in January. In February, a severe winter storm wreaked havoc and left parts of Kentucky and West Virginia deemed major disaster areas.

Now, with spring officially here, the severe thunderstorm/tornado season is off to an unfortunately robust start.

Billion-dollar disasters in 2024: All this is happening on the heels of a horrid 2024. The National Oceanographic and Atmospheric Administration’s (NOAA’s) National Centers for Environmental Information (NCEI) tracks the country's confirmed weather/climate disaster events with losses exceeding $1 billion.

Or, possibly more accurately, tracked these disasters. If it isn't already on the Department of Government Efficiency's (DOGE's) hit list, it likely will be since it contains one of the words — climate — banned under the current Trump administration.

But until the database is taken down, what might (probably will) be NCEI’s final data analysis shows there were 27 such $1-billion-plus damage events last year.

As the NCEI graphic below shows, last year's 27 extraordinarily costly, both in lives and dollars, weather started with a tornado outbreak in the South and a major East Coast storm. Then came winter storms, followed with the season change by tornadoes. Twister-spawning storms also usually produced damaging hail and heavy rain that led to flooding and accompanying land- and mudslides.

      
In May, a mean Mother Nature last year threw in a derecho for evil grins. A seriously active hurricane season arrived in the summer, with Beryl, Debby, Francine, Helene, and Milton devastating areas well beyond their coastal landfalls. Add to that wildfires, and the persistent year-round 2024 drought that created the flames’ fuel.

Help from government and private funds: State and federal government agencies provided some help. But in many cases, those who survived major disasters also had to come up with money to make repairs and recover some semblance of their pre-disaster lives.

A lot of them turned to the largest pool of money they had available, their retirement savings.

While that’s not the planned or ideal use of a nest egg, it is often the necessary financial move following a disaster. And to help those who must tap tax-advantaged accounts, federal lawmakers changed the rules to make such account distributions easier and less costly.

I wrote about these changes enacted as part of 2022’s Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 in my blog post Retirement plan tax rules when using the savings to recover from a disaster.

The major change is that eligible owners of certain tax-favored retirement accounts now may withdraw up to $22,000 to help in their recovery from major disaster damages without incurring the usual 10 percent early distribution tax.

Easing access to tax-favored accounts: I’m referencing that blog post again now, since this weekend’s tornado outbreak could result in many Southern residents facing difficulty storm recovery decisions. It is part of today’s Saturday Shout Outs on the topic of using retirement funds after a declared major disaster.

Here go the shouts, starting with information directly from the Internal Revenue Service.

In IRS Tax Tip 2025-04 in January, the tax agency elaborates on how to Access retirement funds in a disaster under the SECURE 2.0 rules. The tax tip contains several links to other IRS.gov resources that could help those who need to withdraw these funds.

Three Morgan Lewis attorneys (R. Randall Tracht, Claire E. Bouffard, and Jewelle Vernon) focus in the firm’s Law Flash on one part of the IRS advice, the SECURE Act 2.0: IRS Issues Fact Sheet on Disaster Relief Distributions and Plan Loans.

John Iekel also offers his take on the topic for the American Society of Pension Professionals & Actuaries (ASPPA) in Major Disaster? Under SECURE 2.0 it’s Easier to Access Retirement Funds.

Robert Bloink and William H. Byrnes in a piece for Think Advisor note that Clients Can Tap Their 401(k) After a Disaster. Here's What to Know.

These New 401(k) Rules Make It Easier to Access Your Cash writes Meredith Dietz in Lifehacker.

Trina Paul gets to the nitty-gritty in How To Access Retirement Savings Early and Penalty-Free For Disaster Relief piece for Investopedia.

Tamara E. Holmes also gets into specifics, focusing on workplace plan disaster distributions, in her AARP article New 401(k) Rules Let You Withdraw $1,000 Without Penalty — but Should You?

Be ready beforehand: If you’re in a threatening weather area this weekend — or ever! — tune in to your local news and public safety outlets and heed their warnings.

Also be prepared well before the storms arrive.

And if worse comes to worst and you need to tap your nest egg to rebuild after a disaster, take note of the steps in these articles on just how to do that with the IRS’ blessing.

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