Plan seeks to al­low IRA, 401(k) for home re­pair

Sim­i­lar pro­vi­sions granted af­ter Ka­t­rina, Sandy and Rita

USA TODAY US Edition - - MONEY - Roger Yu

Har­vey vic­tims may soon get an un­usual funding source as they dig out — their re­tire­ment plans.

Re­tire­ment plan lob­by­ists are ask­ing the fed­eral gov­ern­ment to waive fi­nan­cial penal­ties for af­fected South­east Tex­ans if they with­draw funds from their in­di­vid­ual re­tire­ment ac­counts (IRA) or work-spon­sored 401(k) or 403( b) re­tire­ment sav­ing ac­counts.

Peo­ple who with­draw funds from re­tire­ment ac­counts be­fore they turn 591⁄ years old typ­i­cally have to pay a 10% penalty and other state and fed­eral taxes.

“This may be the only sav­ings in­di­vid­u­als may have set aside,” says Nevin Adams, chief of mar­ket­ing and com­mu­ni­ca­tions for the Amer­i­can Re­tire­ment As­so­ci­a­tion, which is sup­port­ing the penalty-waiver pro­posal. Sim­i­lar re­tire­ment ac­count-re­lated re­lief pro­vi­sions were granted by the In­ter­nal Rev­enue Ser­vice and other fed­eral agen­cies to vic­tims of Hur­ri­canes Ka­t­rina, Sandy and Rita, Adams says.

Only about 20% of the re­gion’s res­i­dents who have had their homes dam­aged by Trop­i­cal Storm Har­vey are es­ti­mated to have flood in­sur­ance, and the pro­posal could open up ad­di­tional funding sources for those who want to self-fund home re­pair.

The Fed­eral Emer­gency Man­age­ment Agency will of­fer some fed­eral fi­nan­cial help. But the agency has av­er­aged only about $5,000 in in­di­vid­ual pay­outs in past dis­as­ters, says Carolyn Kousky, director for pol­icy re­search and en­gage­ment at the Whar­ton Risk Cen­ter of the Univer­sity of Penn­syl­va­nia.

With­draw­ing from re­tire­ment ac­counts early is al­ways a dicey gam­ble as money in them is “locked in” and grows over time with com­pound­ing in­ter­est. “You can never put that money back later,” says Greg McBride, chief fi­nan­cial an­a­lyst at per­sonal fi­nance site Bankrate.com.

“Think very care­fully be­fore mak­ing an early with­drawal from a re­tire­ment ac­count,” he said. “Even for per­mis­si­ble rea­sons, this deals a per­ma­nent set­back to your re­tire­ment plan­ning.”

McBride ad­vises scour­ing for other funding sources first be­fore tap­ping into re­tire­ment ac­counts. Emer­gency sav­ings and low cost bor­row­ing — such as a zero-per­cent in­tro­duc­tory rate on credit cards or low-rate per­sonal loans — should be con­sid­ered, he says.

“Think very care­fully be­fore mak­ing an early with­drawal from a re­tire­ment ac­count. ... This deals a per­ma­nent set­back to your re­tire­ment plan­ning.”

Greg McBride, chief fi­nan­cial an­a­lyst,

Bankrate.com

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