Raising Cash to Make Hurricane Damage Repairs

Question: My house was damaged by Hurricane Harvey. I received an advance payment from my insurer for a few thousand dollars, but I need more money to start making repairs. What is the best way to come up with cash to pay for repairs while waiting for my claim to be paid? I do have a lot of money in my IRAs and 401(k).

Answer: Special disaster relief rules make it easier to access your retirement savings after the hurricanes, but consider other strategies for raising money first because plundering your retirement funds can have a negative impact on your future finances.

For instance, you may qualify for a Small Business Administration disaster loan, which despite its name isn't limited to small businesses. You could receive up to $200,000 to restore your primary residence, plus another $40,000 to repair or replace personal property. The loan term is typically 15 to 30 years, with the first payment deferred for 11 months. You'll pay a fixed interest rate of 1.75% to 3.5%, depending on your income and assets. You can take out an SBA loan even if you have insurance, but you can't borrow money and use insurance money to pay for the same item or repair. It can take a few weeks to be approved, and there's no penalty if you change your mind and decide not to take out the loan. See the U.S. Small Business Administration's Disaster Loan Assistance page for more information.

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Or you may be able to piece together some other sources of help. Military families may qualify for emergency disaster grants through their armed forces emergency relief organization for their branch of service. As of late October, Army Emergency Relief had helped 540 active duty and retired soldiers, providing $380,000 in assistance for victims of Hurricanes Harvey, Irma and Maria. (The relief organization is now helping victims of the California wildfires, too.) You may also find local programs providing grants for hurricane victims through your area United Way or community foundation (see the Council on Foundations). The United Way of Greater Houston's After the Storm disaster resource guide lists many sources of help and aid, for example.

Talk with your employer, financial institutions, lenders and other organizations to find out whether they're offering disaster grants, special assistance or extra time to make loan payments.

And consider other sources of emergency funds. If you already have a home-equity line of credit, for example, that may be the best way to access extra money without having to raid your retirement funds, says Greg Rosica, a tax partner at the accounting firm of EY and contributing author to the EY Tax Guide 2018.

"Sit down and look at what you have and what sources you have available to you, and prioritize which ones make sense to tap into," says Rosica. "Make your retirement accounts a low priority of sources to go to, because if you pull from there, you're impacting a lot more than your current lifestyle—you're affecting your future." See The Best Places to Get Money in an Emergency When You Don't Have an Emergency Fund for more information.

But if tapping retirement accounts is your only option for raising cash, the federal government has made it less financially onerous to do so.

President Donald Trump signed a disaster relief act on September 29 that lets hurricane victims living in federally designated disaster areas from Hurricanes Harvey, Irma and Maria withdraw up to $100,000 from their IRAs without the 10% early-withdrawal penalty. The withdrawals will still be taxable, but you can choose to spread out the taxable portion of the withdrawal as income over three years so that you won't have to pay taxes on the distribution all at once. This is similar to disaster assistance provided after Hurricanes Katrina, Rita and Wilma in 2005, says Karl Leslie, who is principal attorney for Wolters Kluwer, a regulatory consulting firm. (If you have a Roth IRA, you can always withdraw contributions from it without paying taxes or penalties.)

The disaster relief act also gives you up to three years to repay the qualified hurricane distribution to your retirement account tax-free, which can be an even better option if you ultimately get money from the insurance company to pay for the repairs. If you already paid income taxes on all or a portion of the withdrawal, you'll be able to file an amended return and get the money back.

See the IRS's Help for Victims of Hurricane Harvey and Help for Victims of Hurricanes Irma and Maria pages for more information about the areas that qualify for the tax relief. These special rules apply for distributions made on or after August 23, 2017, for Hurricane Harvey, September 4 for Hurricane Irma, and September 16 for Hurricane Maria, says Leslie. The qualified hurricane withdrawals must be made before January 1, 2019.

Another option may be to take a loan from your 401(k). The IRS and Department of Labor relaxed the 401(k) loan rules to let hurricane victims borrow more money and to give them longer to repay the loan. Under the regular rules, you can usually borrow up to $50,000 or half of your 401(k) balance, whichever is less. But hurricane victims have until December 31, 2018, to borrow up to $100,000 or the full balance in their 401(k), whichever is less. And the date to start repaying the loan is delayed for one year; after that, borrowers will have five years to pay it back.

Between pulling money out of an IRA or borrowing from a 401(k), the loan is the better choice, says Rosica. "You don't pay taxes on it, and you're paying it back and not just withdrawing it."