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Lesko Financial: Advises Caution to Borrow From Retirement Fund

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Bryanna: Is it a good idea for those affected by Hurricane Harvey to borrow from their retirement?  

Greg: The government has eased up restrictions on withdrawing money from retirement accounts for those affected by Hurricane Harvey.
The IRS relaxed normal hardship rules for taking distributions from workplace plans such as 401k’s and 403b’s. They also broadened the definition of “hardship” to include food and shelter and did away with some administrative requirements. Savers can also tap their accounts for relatives affected by the storm. But be aware that these distributions are subject to normal income taxes… and, for those under 59 and ½, an additional 10% penalty, so it could be a costly way to get relief.    

Bryanna: Could they borrow from their plans instead?    

Greg: The government also said that those with 401k’s could borrow up to half of their vested account balance to a maximum of $50,000 to pay for storm recovery. These types of loans are usually tax-free if paid back within five years. But there are fees involved and someone who misses the deadline could be hit with taxes and penalties. If they lose the job or leave it, the balance could become due immediately.    

Bryanna: So, tapping retirement accounts is not a good idea?  

Greg: It’s unadvisable. In addition to possible taxes and penalties, someone who taps money saved for retirement loses momentum and misses the growth those funds might have seen if they’d left it untouched. Our heart goes out to those affected by the storm. But hurricane survivors should be cautious and perhaps think of tapping their retirement accounts only as a last resort