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Relief for Hurricane Victims

Katrina Emergency Tax Relief Act of 2005 Retirement Provisions

On September 21, 2005 President Bush signed into law the Katrina Emergency Tax Relief Act of 2005 (KETRA). KETRA includes provisions specifically related to retirement plans to provide financial relief to those affected by Hurricane Katrina.

Tax Favored Withdrawals from Retirement Plans

The first provision in KETRA waives the 10% early withdrawal tax on “qualified Hurricane Katrina Distributions” from a plan, annuity, or IRA. A qualified Hurricane Katrina Distribution is any distribution from a plan on or after August 25, 2005 and before January 1, 2007 to an individual whose primary residence on August 28, 2005 was located in the Hurricane Katrina disaster area, and suffered economic loss as a result of the hurricane. The maximum amount an individual may withdraw from all plans is $100,000.

The withdrawal is treated as taxable income for the individual, but may be spread out over 3 tax years. The income will not be taxed, if the individual repays the amount to an eligible plan to which a rollover contribution of the distribution could be made. For example: An individual, who withdraws $100,000 from a qualified plan, will be taxed over the next three years for the total amount of the withdrawal. However if in the third year, the individual repays the entire amount of $100,000 into an annuity then the individual may file amended returns to recover any income tax paid on the withdrawal.

Recontributions of Withdrawals for Cancelled Home Purchases

If an individual took a qualified distribution from a plan for the purpose of purchasing or constructing a primary residence, and the transaction was terminated due to the hurricane, then the individual may recontribute up to the amount withdrawn. A qualified distribution is a hardship distribution or first-time buyer distribution that was received between February 28, 2005, and August 29, 2005. Any portion of the qualified distribution may be recontributed anytime between August 25, 2005, and February 28, 2005.

Loans From Qualified Plans for Hurricane Relief

The third provision in KETRA raises the amount a qualified individual may borrow from a qualified plan before it is treated (and taxed) as a distribution. The new allowable amount is the lesser of $100,000 or the present nonforfeitable accrued benefit in the individual’s plan. This provision also provides relief for individuals who borrowed from their plans and have a repayment due between August 25, 2005 and December 31, 2006. Individuals owing money to the plan in that time period may delay the due date for one year. All subsequent due dates will be adjusted to reflect the delay in the due date.

Read Sections 101, 102, 103 and 104 of the Katrina Emergency Tax Relief Act of 2005 Public Law 109-73 [PDF]