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Special Retirement Rules for Hurricane Sandy Victims

Emily Brandon

Victims of Hurricane Sandy will be allowed to tap their retirement accounts without the usual restrictions to help with storm-related costs, due to relaxed IRS rules. Retired people in areas where the storm hit will also get additional time to select a new Medicare plan for 2013. Here's a look at some of the retirement rule changes that apply to Hurricane Sandy survivors:

401(k) hardship distributions. Victims of Hurricane Sandy may be allowed to take 401(k), 403(b), 457(b), and Thrift Savings Plan hardship distributions to help cope with the costs of storm damage. Retirement plans are now allowed to fast-track hardship distributions for employees and their family members who live or work in the disaster area. A person who lives outside the disaster area can also take out a retirement-plan hardship distribution to assist a son, daughter, parent, grandparent, or other dependent who lived or worked in the disaster area.

These Sandy-related hardship withdrawals must be made by Feb. 1, 2013. Also, the usual six-month ban on new 401(k) and 403(b) contributions after a hardship distribution will not apply to people who take Sandy-related withdrawals. However, early withdrawals from 401(k) plans may come with significant costs. "The 401(k) is really money you should not touch unless you absolutely have to," says Lauren Locker, a certified financial planner for Locker Financial Services in Little Falls, N.J. "Look into whatever your other options are and always leave this as a last resort." Regular income tax will still be due on these hardship distributions. And, for people under age 59 1/2, the 10 percent early withdrawal penalty also will be enforced. "You need to make sure you put enough aside to pay the tax bill associated with the hardship withdrawal," says Robert Lickwar, a certified public accountant and partner at Del Conte, Hyde, Annello & Schuch in Farmington, Conn.

[Read: Year-End Retirement Planning Tips.]

401(k) loans. Retirement savers will also be able to take out 401(k) loans to cope with storm-related costs up to limits specified by their retirement plan. "If you need to tap your retirement account, it's better if you can do it via a loan because the loan will allow you to pay yourself back plus interest," says Lickwar. Generally, an account owner may borrow up to 50 percent of his or her vested account balance up to a maximum of $50,000. Retirement plan loan proceeds are typically tax-free if they are repaid within five years. "A loan is better than a distribution," says Dennis O'Brien, a certified financial planner for Coastal Financial Advisors in Farmingdale, N.J. But he cautions, "If you take the loan and are unable to pay it back, then it becomes a distribution later on."

[Read: 401(k) and IRA Changes Coming in 2013.]

Extended Medicare enrollment period. The 2013 Medicare open enrollment period ends on Dec. 7, 2012. However, individuals affected by Hurricane Sandy who are unable to make a plan selection by then will be allowed to enroll in health and prescription drug coverage for 2013 after that date by calling 1-800-MEDICARE (1-800-633-4227). Retirees will generally be enrolled in their new plan selection on the first of the month after they make any changes.

Social Security payments. Retirees who didn't receive a scheduled payment from Social Security due to the storm can go to any Social Security office and request an immediate payment.

[Read: 12 Ways to Increase Your Social Security Payments.]

More time to file tax returns. Taxpayers in areas of Connecticut, New Jersey, New York, and Rhode Island who were affected by the storm will be able to postpone some of their tax filing and payment deadlines. Affected individuals and businesses have until Feb. 1, 2013, to file their fourth-quarter individual estimated tax payment and payroll and excise tax returns and the accompanying payments, which are normally due on Jan. 15, 2013, Oct. 31, 2012, and Jan. 31, 2013 respectively. The IRS will also abate any interest, late-payment, or late-filing penalties that would otherwise apply.

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