The IRS just announced that it is relaxing the rules to make it easier for cash-strapped hurricane victims to take hardship loans from their 401(k) or IRA retirement accounts.

But if you have suffered losses due to Hurricane Harvey or Irma and are thinking of accessing your own money to help you rebuild or replace lost possessions, you should understand that tapping your accounts now puts you at risk of being in worse financial shape in the future.

Among the new IRS rules:

  • If you live or work in a federal disaster area related to either Harvey or Irma, the IRS now allows your employer to let you take a 401(k) hardship distribution or loan more quickly—even before you've completed all required paperwork.
  • You have the right to the same fast-track service if you need the money for a son, daughter, parent, grandparent, or other dependent who lived or worked in the disaster area.
  • The IRS won't prevent you from making 401(k) contributions after you withdraw or borrow the money, as is normally the case.
  • To be eligible for the speedier process, you must apply to your employer for a loan or hardship distribution by January 31, 2018.

Congress is also reportedly weighing legislation for hurricane victims that would eliminate a 10 percent early-distribution penalty imposed on savers younger than 59 ½ years old. However, Congress doesn't appear to be eliminating the ordinary income tax on hardships distributions, so you'll still be on the hook for that.

Think Twice Before Tapping Your Retirement Savings

Byron Ellis, a managing director at United Capital in The Woodlands Township, Texas, outside of Houston, has clients who were affected by Hurricane Harvey. But he recommends avoiding hardship distributions. Aside from the tax consequences, taking money early from your 401(k) means a lower base upon which your savings can grow, he notes.

"It's one of the most cost-prohibitive and long-term damaging things you can do," he says.

Taking a loan from a 401(k), however, may be something to consider in a dire emergency, says Eric Meermann, a Certified Financial Planner and vice president of Palisades Hudson Financial Group in Stamford, Conn. “It can be a better move than running up a lot of expensive credit-card debt,” he says.

Another benefit: If you take out a loan against your 401(k), it is not taxable as long as you pay it back on time, typically within five years (loans to buy a primary residence can be as long as 15 years). And a 401(k) loan isn't subject to a credit check either—helpful if your credit is less than stellar. 

A 401(k) loan comes with its own risks, especially if there's a chance your job is not secure. You may be required pay back your borrowings in full within 60 to 90 days after leaving your current employer, which could force you to dig into other investments at an inconvenient time. 

Alternative Ways to Access Cash

Ellis and Meermann both recommend tapping other resources before using 401(k) savings, assuming you have no emergency fund:

• Small Business Administration loans.  In the federal disaster zones, homeowners may borrow up to $200,000 in long-term, low-interest to repair or replace disaster-damaged real estate, plus $40,000 toward personal property losses. Renters can get disaster loans of up to $40,000 to repair or replace their disaster-damaged personal property like furniture, rugs, clothing, and appliances.

• Mutual funds, stocks, and bonds not tied up in a retirement account. By selling shares of stock you own, you won't face the penalty for early withdrawals, You will, however, have to pay tax on any capital gains unless you can offset them with losses.

• Home equity loan or line of credit. This isn't an option for someone directly affected by the storm, whose home value now could be in question. But it might work for someone not affected by the storm, intent on helping out an affected relative. You can write off the interest on up to $100,000 in home equity borrowed for any purpose. 

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• Life insurance policy. You can borrow off the built-up cash value if you have a whole life, variable life, or other type of non-term life insurance policy. 

• Temporary IRA loan. This is an option if you know you'll be getting funds from another source and can repay the loan within 60 days. After that, the loan is subject to ordinary income tax, Ellis points out. 

Mind the Tax Consequences

If you have some leeway as to when you'll need the funds for your recovery, you may want to time some distributions or stock sales for after the new year. Transactions made in 2018 won't be taxed until April 2019, Ellis notes. 

And if you expect to write off uninsured losses on your tax return, the IRS will let you report those losses on your 2016 return. You must file an amended 2016 return or add the losses to a 2016 return on which you have a filing extension. Tax extensions for 2016 returns, for those affected by the hurricanes, can be filed as late as January 31, 2018.