For the thousands of victims who were affected by Hurricane Sandy, coming up with the funds to cover daily costs or start rebuilding their homes can be challenging. While many may have homeowners and flood insurance to cover the damages, some find that their policies are not sufficient to pay for all the damages. In addition to covering some or all rebuilding costs out-of-pocket, damage to vehicles and replacing lost clothing and belongings add more expenses. To help victims meet their needs, the Internal Revenue Service announced that 401(k)s and other employer-sponsored retirement plans can make loans and hardship distributions to Sandy victims and members of their families.
Those allowed to participate in the flexible rules include 401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans. While those with individual retirement accounts may not take out loans, they may be eligible to receive hardship distributions, the agency explained. In order to obtain the relief, Sandy victims and certain members of their families must live or work in disaster areas and apply for withdrawals by February 1, 2013.
IRS eases rules and guidelines that govern loans, withdrawals
In addition to extending this relief option to victims, the IRS also noted it will ease procedural and administrative rules that typically apply to loans and hardship withdrawals. The relaxed standards are designed to enable taxpayers to gain access to their money more quickly. Further, the six-month prohibition on 401(k) and 403(b) contributions that normally impact employees who take hardship distributions will not apply.
In addition, those who live outside disaster areas may now can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area. The IRS also relaxed the limits on how the funds may be used, and victims are now free to use their distributions or loan money for food and shelter. Those who want to take out a loan or hardship withdrawal should consult their tax office to learn more about the easing of limitations.
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