The property and emotional damage left in the wake of a natural disaster may be compounded by financial stresses. For qualified disaster losses, recent legislation by our federal government could soften the financial impact. First, we’ll define what losses may qualify and then we will summarize key provisions of the legislation.

A qualified disaster loss has three basic requirements:

  • There must have been an economic loss.
  • The principal residence must have been located in the disaster area during the loss.
  • The disaster must have occurred before December 20, 2019.

Summary of Key Provisions

$100,000

  • Distributions of up to $100,000 can be taken from an IRA or employer-sponsored qualified retirement plan as a qualified disaster distribution.
  • The 10% premature distribution penalty normally charged on distributions before age 59½ is waived.
  • The income tax impact of the distribution can be spread over three years to avoid forcing marginal tax rates way up in distribution year.
  • If resources permit, the distribution can be repaid (“recontributed”) to the retirement plan within three years of the distribution.
  • The qualified plan loan limit is temporarily increased from $50,000 to $100,000 for 180 days from December 20, 2019. In some cases, extended repayment schedules may be available.

Taxpayers have less than five months to take qualified disaster distributions. Distributions must be taken no later than “180 days from December 20, 2019.”

NOTEWORTHY – Distributions from qualified employer-sponsored retirement plans may need to be amended to permit qualified disaster distributions.

If you, a family member, or a client suffered a qualified disaster loss, contact a competent tax attorney, CPA or CFP® certificant for further guidance.

bottom-line-img-123

The best retirement strategy is to avoid taking loans or premature distributions from retirement accounts.

But if no other resources are available to deal with qualified losses, the loan and penalty-free provisions from the SECURE Act may deserve careful consideration. In an unprecedent move, distributions can be “recontributed” within three years of the distribution.

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide financial advice to clients. The IRS may issue clarifications that modify the provisions of the act. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.