10% Early Distribution Penalty for Hurricane Repairs

Distributions from qualified retirement plans and IRAs before age 59¹/₂ are not only taxable but also subject to a 10% early distribution penalty. However, there are a number of exceptions that a taxpayer can rely on to avoid the penalty. Unfortunately, suffering damage from a severe hurricane is not one of those exceptions.

In a recent Tax Court case, a couple living near Galveston, Texas, experienced severe property damage and income loss as a result of Hurricane Ike in 2008. The husband, who was younger than 59¹/₂ years old, withdrew $20,000 from his qualified retirement plan. The couple reported the income but, on Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, said he was not subject to a penalty. He noted on the form that the penalty exception that Congress created for victims of Hurricanes Katrina, Rita, and Wilma, the Kansas Disaster Area, and the Midwestern Disaster Area applied to them.

The Tax Court disagreed and imposed the penalty. The penalty exceptions apply only to the specific disaster areas, and not to disasters in general. Texas was not a state included in the Midwestern Disaster Area. While the court sympathized with the taxpayers, the results cannot be changed unless Congress acts.

Source: Jeffrey S. Carter, TC Summary Opinion 2012-33