How To Access Retirement Savings Early and Penalty-Free For Disaster Relief

If you’ve been affected by a major disaster, such as the recent wildfires in California, you may be eligible to tap your retirement funds early and without a penalty. 

Under SECURE 2.0, a 2022 federal retirement law, individuals affected by federally declared major disasters may be able to take up to $22,000 from their retirement accounts—like 401(k)s and individual retirement accounts (IRAs)—without incurring a 10% early withdrawal penalty. Disaster relief rules also allow taxpayers to repay the distribution to their IRA or workplace retirement plan within three years.

“They’re called a qualified disaster recovery distribution—it’s kind of like a last resort for those who are going through an incredibly difficult time,” said Scott Sturgeon, CFP and founder of Oread Wealth.

How Tapping Your 401(k) For Disaster Relief Works

In a recent tax tip, the IRS reminded taxpayers that they may be eligible for disaster relief if they live in a federally declared disaster area or have experienced economic losses due to the disaster, such as displacement or property damage. On January 8, the Federal Emergency Management Agency (FEMA) declared the California Wildfires a major disaster.

The disaster relief provision under the new law also offers greater flexibility for people who want to borrow from their 401(k)s and for some homebuyers who had tapped their retirement accounts early and planned to purchase a home that’s been affected by a major disaster.

Those who take out 401(k) loans after a major disaster can borrow up to the full vested amount in their plan (but less than $100,000) and postpone certain workplace retirement plan loan repayments up to one year. Typically, people are limited to taking out 401(k) loans worth up to 50% of their vested account balance or $50,000, whichever is less.

Additionally, those who had taken a first-time home buyer distribution from their IRA or an early withdrawal from their 401(k) to buy or construct a home, and were unable to, can now repay that distribution.

Access To Funds May Require Some Bookkeeping

An employer has the option of adopting the disaster relief provisions, but individual taxpayers can also take advantage of the qualified disaster recovery distribution on their own.

“If you have a retirement plan that allows you to do this, they should facilitate [you] somewhat. If they don’t, you can still do it on your own, but it’s a matter of tracking all this [information],” said Sturgeon. “I’d suggest hiring or working with a tax professional who can help you navigate the filings that you’re going to need to do.”

About 8% of employers surveyed prior to the wildfires by Alight, a retirement record-keeper, said they had already adopted the $22,000 withdrawal amount for disasters, while 22% said they were ‘definitely’ going to or ‘likely’ to add it. Of those who were ‘definitely’ going to or ‘likely’ to add the provision, more than half said they planned to do so in 2025. One in twenty employers said they had adopted the higher 401(k) loan amount for disasters.

What To Know Before Tapping Retirement Funds

Facing a major disaster is a big challenge and even though these rules make it easier to access your retirement funds to help you in your time of need, Sturgeon suggests people consider other options for immediate liquidity, like excess cash or money invested in taxable brokerage accounts, first.

That’s because when you take money out of your retirement account and put it back later, you’re losing out on the tax-deferred growth for those funds, which could affect your retirement savings goals over the long term.

Also, if you’re unable to repay the distribution, you’ll owe taxes on it.

“If you’re not paying a 10% penalty that’s great, but you’re likely still paying income tax on it if you don’t pay it back and again, lose out on long-term growth,” said Sturgeon.

The money you take out and do not return will be considered taxable income, which you can include in your income as equal amounts over three years.