Plan seeks to allow IRA, 401(k) for home repair
Similar provisions granted after Katrina, Sandy and Rita
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,