To help hurricane victims, congress may make it easier to tap 401(k) accounts – the washington post electricity projects for class 12

House Ways and Means Committee chairman Rep. Kevin Brady (R-Tex.) said he is considering legislation that would suspend a 10 percent penalty that was designed to discourage people from tapping their 401(k) retirement savings before they retire as early as age 59.5.

“I’m not a big fan of this idea for two reasons,” said Douglas Holtz-Eakin, president of the American Action Forum. “We have existing programs to help people and there’s a long list — national flood insurance, community development block grants, small business loans and the list goes on. Those are appropriate.

“This is way at the bottom of tax policy sins, but to me, the tax code is not something you should try to use to solve all problems,” he said. “It’s supposed to raise revenue while ensuring good incentives to invest, innovate and raise the standard of living of the population. This kind of thing goes in the other direction. It discourages saving and tosses the money into disaster relief.

The package “will include tax provisions, some of which will help people access their retirement funds without penalty for rebuilding activities,” Brady said last Thursday. “No two disasters are the same. This won’t be boilerplate. We’re going to tailor these to our communities and their needs going forward.”

The 401(k) savings program, which began with the Revenue Act of 1978, is a tempting source of emergency cash for Americans. The various accounts hold an estimated $5 trillion, which is nearly 20 percent of the total amount of U.S. retirement assets.

The 401(k) program allows people to deduct up to $18,000 off the top of their salary before income tax kicks in. People over 50 can put in another $6,000, called a “catch up” contribution, also tax free. The savings compounds, tax-deferred, until the money is withdrawn. At that point, people must pay the prevailing income tax on the withdrawals.

“We are always reticent to suggest people take money out of their 401(k) plan, but this is a pretty bad situation as is obvious to anyone watching television,” ARA chief executive Brian Graff said. “You can’t have a good retirement if you can’t get your life in order.”

“Taking a loan or a withdrawal from your retirement savings requires a tough decision,” the ICI said in a statement. “Although it is best for the long term to avoid dipping into retirement accounts, some families may need to tap these resources and then reassess their retirement planning after they have recovered.”

Current law allows people to make 401(k) withdrawals to cover unforeseen disasters, but there is a penalty if they do so before the age of 59 and one-half. If Congress passes legislation that relaxes rules, hurricane victims could be allowed to take the money out without incurring the penalty. The income tax will likely remain in effect.

Another way to go has been to allow people to more easily take loans against their 401(k)s. The government has eased the rules covering hardship loans against 401(k)s following Hurricane Harvey, just as they did with Katrina. Following Katrina, people could borrow up to $100,000 or 100 percent of their account balance.

“When people have a crisis, they have a crisis and this is their own money,” said Diann Howland of the American Benefits Council. Howland said she was not worried that people wouldn’t replenish their savings, whether they have taken a loan against the 401(k) or have taken an early withdrawal.