In the wake of Superstorm Sandy, there are several options for using retirement savings to help you or friends and family recover from the disaster.
The IRS has announced that it will allow employees and former employees to receive loans or take hardship distributions from their 401(k)s, 403(b)s or 457(b) accounts under these conditions.
- You must live in the covered disaster areas of Rhode Island, Connecticut, New York and New Jersey. A person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lives or works in the disaster area. The IRS says more states and areas within them are likely to be added to the list of officially designated disaster areas.
- Even retirement plans that don't otherwise offer loans can do so for Sandy victims without changing their loan documents.
- Hardship distributions aren't limited to the reasons currently listed in the plan documents or by the IRS.
- You don't have to document need. Plan administrators can take your word for the amount you need and the reasons why.
- Plan administrators can expedite the distribution or the hardship loan and worry about the paperwork later.
- All loans and distributions must be completed by Feb. 1, 2013.
- If you have an IRA, laws prohibit loans, but you may take a hardship distribution.
- Hardship distributions are generally subject to income taxes and a 10 percent early withdrawal penalty. Loans are tax free if repaid in five years or less.
If you have friends or family members who need a loan in the wake of Superstorm Sandy, Adam Bergman, a tax attorney for the IRA Financial Group, suggests that you consider lending them what they need from your self-directed IRA.
The IRS rules are strict. You can't lend to "lineal descendants (parents, children, spouse, daughter-in-law or son-in-law or any entity controlled by such persons," Bergman says, but you can lend to someone not on this list, including siblings, aunts, uncles, cousins and friends.
You must charge a competitive interest rate; otherwise, the IRS will consider this a gift. Bergman suggests that you lend at no less than prime, which is 3.25 percent currently. But he adds that considering the cost of borrowing from a credit card, loans at higher rates are fair.
"A lot of our clients are able to help out a friend or family member short term -- pay for things while they get back on their feet -- and help their own retirement planning, too, by charging 5 percent or 6 percent interest with very little risk," he says.