Disasters are unpredictable, but as a financial advisor, you are in a unique position to help your clients prepare for and recover from them. Thanks to SECURE 2.0, there are new provisions that can support your clients during difficult times, including expanded distributions, tax relief, and plan loan options.
These provisions are applicable to any client whose principal residence was in a federally declared disaster area or who sustained an economic loss by reason of a federally declared disaster. Examples of economic loss could include damage to personal property from fire, flooding, wind, or other causes; loss related to an individual’s displacement from home; and loss of livelihood due to temporary or permanent layoffs.
How Disaster Withdrawals Work
A client can take $22,000 from all eligible retirement plans (401(k) plan, money purchase pension plan, section 403(b) plan, and governmental section 457(b) plan). A distribution of a qualified individual from an eligible retirement plan must be before the date that is 180 days after the latest of
Dec. 29, 2022
First day of the incident period with respect to the qualified disaster
Date of the disaster declaration with respect to the qualified disaster
Your client may repay all or part of the amount of a qualified disaster recovery distribution to an eligible retirement plan if the qualified individual completes the repayment within the 3-year period beginning on the day after the date the distribution was received. If the distribution is repaid, it will be treated as though it were repaid in a direct trustee-to-trustee transfer so that your client doesn’t owe federal income tax on distribution. The 10% additional tax does not apply to any qualified disaster recovery distribution made to your client if repaid.
It is optional for employers to adopt the expanded distribution and loan rules. However, even if an employer doesn’t treat a distribution as a qualified disaster recovery distribution, your client may still do so through this form. However, it is important to note that your client’s employer must have a plan that is eligible for qualified disaster distributions.
How Disaster Withdrawals Affect Taxes
Financial advisors should remind clients that any qualified disaster recovery distribution they receive should be reported on their federal income tax returns over the 3-year period beginning with the year of receipt unless they elect on Form 8915-F to include the entire amount in income in the year of receipt. The payment of a qualified disaster recovery distribution to your client must be reported as well on Form 1099-R.
To find out if your client was affected by a federally declared disaster and can use qualified disaster withdrawals, consult this list. Even in hard times, there are resources to help. 401GO will be there along the way to guide you and ensure your clients receive the care they need.
