US. Wiles: Why you shouldn’t tap into your retirement plan after disasters
In the wake of a disaster like Hurricanes Harvey or Irma, a job loss or other financial trauma, it’s natural to look to 401(k)-style retirement plans or Individual Retirement Accounts for help. Retirement plans are among the largest sources of fairly liquid, non-housing money available to millions of Americans. They are tempting sources of ready cash.
The Internal Revenue Service recently acknowledged as much, reminding Harvey victims with 401(k) accounts that they could tap these plans in a pinch. In fact, the IRS is relaxing certain retirement rules, making it easier for people in disaster areas to pull money out. However, the agency isn’t easing the associated tax bite, including penalties, that can arise. “The tax treatment of loans and distributions remains unchanged,” the IRS noted.
Taxes are a big reason why retirement accounts usually aren’t good places to turn for quick cash. Taxes, penalties, plan complexities and opportunity costs can turn withdrawals, and perhaps even loans, into bad decisions.
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