Disaster victims can access retirement savings

February 23 – March 1, 2018 I Vol. 18, No. 50 I Opinion

By Christine Roberts

The recently-signed Bipartisan Budget Act of 2018 expands access to 401(k) and other retirement plan savings for those impacted by the California wildfires that occurred late last year in federally-declared disaster areas including Santa Barbara and Ventura counties, and by flooding, mudflows and debris flows directly related to the wildfires.

The expanded access is available to individuals whose principal residence is or was located in the California wildfire disaster area and who sustained an economic loss – whether personal or business – as a result of the wildfires and related events, and whose employer agrees to amend their plan by Dec. 31, 2019 to include the special rules (retroactive to 2018). Those taking IRA distributions should check with their IRA custodians or trustees regarding availability of the new measures.

There are three main types of expanded access:

• Special withdrawal rules. Eligible individuals may take plan or IRA distributions of up to $100,000 without application of the 10 percent penalty tax that ordinarily applies before age 59½. Although California’s Franchise Tax Board generally follows federal disaster relief, a California early withdrawal penalty of 2.5 percent may apply, so check with your CPA. The distribution must take place between Oct. 8, 2017 and Dec. 31, 2018.

The tax impact may be spread over up to three years from the date of the distribution, or tax may be avoided entirely by repaying the full amount to the plan, or an IRA, within the same three year period.

• Retirement plan loan relief. An extension of up to one year applies to repayments due on a plan loan that was outstanding on or after Oct. 8, 2017. The one year extension does not cause the loan to exceed the maximum five-year repayment period. Interest continues to accrue during the extension. New plan loans may be taken out on or after Feb. 9, 2018, through Dec. 31, 2018 in an amount up to the lesser of $100,000, or 100 percent of the vested retirement plan account (increased from $50,000 or 50 percent). The limit is reduced by an amount equal to the highest outstanding balance of all loans during the prior twelve months.

• Repayment of amounts taken out to buy or build a home in the disaster area. Persons who took hardship withdrawals from their plans after March 31, 2017 and before Jan. 15, 2018 in order to buy or build a personal residence can re-deposit their withdrawals, or roll them to an IRA, by June 30, 2018, if the purchase or construction could not go forward as a result of the wildfires. The same relief is available to first-time homebuyer IRA withdrawals made during this time.

In earlier guidance, the IRS extended the filing deadline for personal and business income taxes by two weeks for those affected by the California wildfires, and California’s Franchise Tax Board granted equivalent relief for state returns. The new deadline for personal returns is April 30, 2018.

• Christine Roberts is a partner at law firm Mullen & Henzell LLP in Santa Barbara. Visit her blog at: