Tax Filing Relief and Retirement Account Withdrawal Options for Hurricane Victims
IRS Tax Filing Relief and Retirement Account Withdrawal Options for Hurricane Victims
Victims of Hurricane Helene have at least a glimmer of good news when it comes to their tax filings and ability to withdraw from their retirement accounts for disaster-related expenses.
Tax Filing Deadlines Extended for Hurricane Helene and Milton Victims
The IRS usually postpones certain tax deadlines for individuals affected by federally-declared disaster areas. On October 1, the IRS announced disaster tax relief for all individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. Generally, the IRS extended the deadline to file certain individual and business tax returns and make tax payments until May 1, 2025. It is likely the IRS will provide similar relief for victims of Hurricane Milton.
Retirement Account Withdrawals for Disaster Relief
Meanwhile, as a result of SECURE 2.0, victims of federally declared-disasters (such as Hurricanes Helene and Milton) can withdraw up to $22,000 from their IRAs. If you are under age 59 ½, you won’t have to pay a 10% early distribution penalty on these withdrawals. Further, the taxable income on these withdrawals can be spread over three years, and the funds can be repaid over three years. Your employer plan may also allow these withdrawals. Even if your plan doesn’t allow disaster-relief withdrawals, you may be able to treat a hardship withdrawal (see the last paragraph of this article) as a disaster-relief withdrawal on your federal tax return – this would allow you to avoid the 10% penalty, spread income over three years and repay the withdrawal.
SECURE 2.0: Additional Benefits for Hurricane Victims
SECURE 2.0 also allows you to pay back a withdrawal you made prior to a disaster that you intended to use to purchase or construct a home if you are unable to use the funds because of the disaster. Finally, if you have a company plan that allows for loans, the plan can allow you to borrow a larger amount and give you additional time to repay outstanding loans.
Penalty-Free Emergency Withdrawals from IRAs
You may also take penalty-free withdrawals from your IRA for “unforeseeable or immediate financial needs relating to personal or family emergencies.” Your employer plan may also allow emergency distributions. These withdrawals are limited to one per calendar year and are limited to $1,000. Once an emergency withdrawal is taken, no other emergency withdrawal can be taken in the following three years unless the original distribution is repaid or future salary deferrals (for plans) or contributions (for IRAs) exceed the amount of the original distribution.
Hardship Withdrawals: Tax and Penalty Considerations
Finally, if your plan allows, you may be able to take a hardship withdrawal from your account. The withdrawal must be for an “immediate and heavy financial need.” Most plans allow employees to automatically satisfy this requirement if their expense fits into one of seven “safe harbor” categories. One of those categories is disaster-related expenses and losses. There is no dollar limit on hardship withdrawals, but withdrawing pre-tax funds subjects you to tax and the 10% penalty if you are under 59 ½.
By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
Frequently Asked Questions (FAQ) About Hurricane Relief
1. Who qualifies for IRS tax relief for Hurricane Helene and Milton?
The IRS offers tax relief to individuals and businesses affected by federally declared disasters. For Hurricane Helene, this includes residents of Alabama, Georgia, North Carolina, South Carolina, and parts of Florida, Tennessee, and Virginia. Victims of Hurricane Milton are expected to receive similar relief.
2. What is the deadline to file taxes for hurricane victims?
For those affected by Hurricane Helene, the IRS has extended the tax filing deadline to May 1, 2025. The extension covers filing individual and business tax returns and making tax payments.
3. How much can I withdraw from my IRA for disaster-related expenses?
Under SECURE 2.0, victims of federally declared disasters can withdraw up to $22,000 from their IRAs without incurring the 10% early distribution penalty, even if they are under the age of 59 ½.
4. Can I spread the taxable income from a disaster-related IRA withdrawal?
Yes, the taxable income from disaster-related IRA withdrawals can be spread over three years, reducing the immediate tax impact.
5. What happens if my employer’s plan doesn’t allow for disaster-relief withdrawals?
If your employer plan doesn’t offer disaster-relief withdrawals, you may still be able to claim a hardship withdrawal as a disaster-relief withdrawal on your federal tax return, avoiding the 10% penalty and spreading the income over three years.
6. Can I repay IRA withdrawals taken for a home purchase affected by a disaster?
Yes, SECURE 2.0 allows you to repay IRA withdrawals made before a disaster if you intended to use the funds to purchase or construct a home, but the disaster prevented you from doing so.
7. Are there penalties for emergency IRA withdrawals?
You may take one penalty-free emergency withdrawal per calendar year, limited to $1,000. Additional emergency withdrawals can only be made if the original withdrawal is repaid or future contributions exceed the amount withdrawn.
8. What is a hardship withdrawal, and how does it work?
A hardship withdrawal can be taken from your retirement account if you have an "immediate and heavy financial need," such as disaster-related expenses. While there’s no dollar limit, taxes and a 10% penalty may apply for pre-tax funds if you are under age 59 ½.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.