Withdrawals for Qualified Disaster Distributions
By TRG Advisors on August 22, 2023
Understand the rules related to Section 331 of the Secure Act 2.0
In late 2022, a monumental piece of retirement legislation was signed into law: The Secure Act 2.0. The legislation includes a wide range of provisions intended to increase retirement savings, including by encouraging individuals to contribute more to their tax-deferred retirement accounts without the fear of not being able to access their money when they unexpectedly need it most.
Here is a summary of Section 331 of the Secure Act 2.0, which allows penalty-free withdrawals from retirement accounts for those suffering losses from a federally declared disaster, provided certain criteria are met.
What changed with Section 331?
This provision of the Secure Act 2.0 allows individuals suffering losses from a federally declared disaster to access assets held in their employer retirement plan (e.g., a 401(k) plan) or individual retirement account (IRA) without being subject to the 10% penalty that typically applies to early withdrawals.
What amount can be withdrawn?
You can withdraw up to $22,000 from your employer retirement plan or IRA if you are eligible to receive the benefits of a qualified disaster distribution. Note that if you qualify, these distributions are permitted without regard to your need or actual amount of economic loss.
From which types of accounts can qualified disaster distributions be made?
Eligible retirement accounts include any of the following:
- A qualified pension, profit-sharing or stock bonus plan, including a 401(k) plan
- A qualified annuity plan
- A tax-sheltered annuity contract
- A governmental section 457 deferred compensation plan
- A traditional, SEP, SIMPLE or Roth IRA
It’s important to note that the Section 331 provision is optional for employer retirement plans. If you plan to take the withdraw from your 401(k) or other employer retirement plan, you will need to confirm that your specific plan has been amended to allow for qualified disaster distributions.
What criteria must be met to qualify for this distribution?
You may be eligible to receive the benefits of a qualified disaster distribution if:
- You sustained an economic loss because of the disaster
- The disaster was a qualified 2021 or later disaster
- Your main home was located in a qualified disaster area at any time during the disaster
Please note that there are further specific rules and definitions related to all of these criteria provided by the IRS that you may need to further discuss with a tax advisor.
What qualifies as a disaster?
A qualified disaster has been officially declared by the president to be a major disaster, also known as a federally declared major disaster. To determine whether the President has declared a major disaster, visit the Federal Emergency Management (FEMA) website.
Can the amount withdrawn be repaid?
Yes, if you choose, you can generally repay any portion of a qualified disaster distribution within three years of the distribution, with certain exceptions. Also, if you are recontributing to an employer retirement plan, it must accept rollover contributions.
Are withdrawals taxed?
Yes.Generally, a qualified disaster distribution is included in your taxable income in equal amounts over three years and taxed at applicable income tax rates. However, you also have the option to include the entire distribution in your income in the year of the distribution.
What are some of the main differences between a hardship withdrawal and a qualified disaster distribution?
A hardship distribution is a withdrawal you make from an employer retirement plan because of an immediate and heavy financial need. Some of the main differences of a hardship withdrawal relative to a qualified disaster distribution include (but are not limited to):
- The distribution amount is limited to the amount necessary to satisfy the financial need
- Withdrawals can be made for much broader reasons, including medical expenses, avoiding eviction or paying funeral expenses, in addition to potentially being eligible to cover losses related to qualified disasters
- The withdrawal can’t be repaid
- The amount withdrawn is taxable in the year it is distributed (i.e., versus being spread out across three years)
What are the reporting requirements?
If you receive a qualified disaster distribution you should use the applicable IRS Form 1040 and IRS Form 8915-F (Qualified Disaster Retirement Plan Distributions and Repayments) to report the distribution or any repayment.
What should you do if you would like to make a qualified disaster distribution?
Talk to a tax advisor to confirm you meet the criteria and understand the tax implications. You should also consider speaking to a financial advisor, who can help you decide ― in the context of your broader financial picture ― if a qualified disaster distribution is the best way to meet your immediate financial needs.
Internal Revenue Service, Instructions for Form 8915-F, https://www.irs.gov/pub/irs-pdf/i8915f.pdf. Accessed August 16, 2023.
Internal Revenue Service, “Hardships, Early Withdrawals and Loans,” https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans. Accessed August 16, 2023.
Senate Finance Committee, Secure 2.0_Section by Section Summary 12-19-22, https://www.finance.senate.gov/download/retirement-section-by-section-. Accessed August 16, 2023.