Bill Blocks 401(k) Withdrawal Penalties After Natural Disasters

early withdrawal penalty
Image credit: © Mikhail Kusayev | Dreamstime.com

With hurricane season upon us, Senators Bill Cassidy, R-La., and Bob Menendez, D-N.J., introduced a bill Tuesday to expedite relief to those impacted by natural disasters.

Individuals affected by hurricanes, floods, wildfires, etc. would be able to access their retirement benefits without being forced to pay any withdrawal fees or penalties or wait for Congress to take action. They will have access to their benefits in order to cover emergency costs stemming from natural disasters.

Congress usually steps in to waive the penalties, such as the 10% withdrawal fee, to pay for costs incurred by the disaster, as was the case with COVID. The IRS will also typically waive penalties on a per-disaster basis. The relief usually takes weeks and even months, something the bill, with its blanket forgiveness, seeks to address.

When Hurricane Katrina hit in 2005, it took Congress four weeks after the hurricane made landfall to pass the Katrina Emergency Tax Relief Act.

“When disaster hits, families and business owners should not be penalized when using their savings while trying to get back on their feet. Saving for retirement is hard enough, let alone during disasters,” Cassidy said in a statement.

“Victims of disasters deserve a quick response from the federal government when they need it the most,” Menendez added. “As we have learned from the devastating effects of superstorm Sandy in New Jersey, the disparate treatment of victims affected by natural disasters is unfair and ultimately counterproductive for recovery efforts. Our bipartisan bill would fix this issue by permanently providing relief measures that would automatically apply once a Presidential disaster declaration is issued, directly helping victims instead of having them wait for Congressional action.”

ARA comments

The American Retirement Association praised the bill, noting that every year tens of thousands of Americans are victims of disasters from floods, tornadoes, hurricanes, forest fires, or more recently a global health pandemic.

“Because there are not permanent rules on the use of retirement funds by individuals impacted by these situations, victims are dependent upon Congressional action after the occurrence of each disaster,” the ARA said. “The ARA strongly supports permanent retirement plan tax relief measures that would automatically apply once a Presidential disaster declaration is issued. ARA applauds and supports Senators Cassidy and Menendez’s legislation that would make eligibility for these distributions in these circumstances permanent.”

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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