Hurricane Katrina: IRAs, sec. 401(k)s and similar retirement plans.

• Author: Wimer, Ruth
• Position: Individual retirement accounts

Under the Katrina Emergency Tax Relief Act of 2005 (KETRA), individuals living in the Hurricane Katrina disaster area (see Exhibit 3 on p. 9) with economic losses resulting from it, may be able to obtain relief through IRAs and Sec. 401(k) and similar plans.

Withdrawals

According to KETRA Section 101, affected individuals may be able to withdraw up to $100,000 from an IRA, Sec. 401(k), Sec. 403(b), governmental Sec. 457 or similar employer-sponsored retirement plan, without being subject to the Sec. 72(t) 10% penalty on early withdrawals; see JCX-69-05 (9/22/05), p. 3, and Notice 2005-92.

Eligibility requirements: To be eligible to make the withdrawal, the individual must have:

* Been living in the Hurricane Katrina disaster area on Aug. 28, 2005; and

* Suffered an economic loss as a result of that hurricane.

Eligible individuals may withdraw up to $100,000 from their retirement plans, penalty-free, from Aug. 25, 2005 to Dec. 31, 2006. They can then include one-third of the withdrawn amount as income on their tax returns each year for three years, beginning with the withdrawal year.

If the amount withdrawn is replaced within three years of receipt, no income tax would be due on it. If tax was paid over the three-year period and the amount withdrawn was subsequently replaced, there will be no need to file an amended tax return to recoup the tax paid.

Example 1: K withdrew $50,000 from her Sec. 401(k) on Oct. 1, 2005 and redeposited it by Dec. 31, 2005. She does not have to pay income tax on the $50,000.

Example 2; K withdrew $60,000 from her Sec. 401(k) on Oct. 1,2005 and includes one-third of that amount ($20,000) as income on her 2005 return. She then redeposits $60,000 on Dec. 31, 2006. K does not have to include two-thirds of that amount ($40,000) on her 2006 and 2007 returns, and may file for a refund of the tax paid in 2005 on the $20,000.

Example 3: K withdrew $60,000 from her Sec. 401(k) on Oct. 1, 2005 and includes $20,000 as income on her 2005 return, and $20,000 on her 2006 return. On June 1, 2007, she repays $25,000 to her retirement plan. K does not have to include the remaining $20,000 on her 2007 return and may file for a refund of a portion of the tax paid in 2005.

Withdrawal limits: The $100,000 limit on penalty-free withdrawals means individuals cannot withdraw more than a combined total of $100,000 from all of their retirement plans. If they have a Sec. 401(k) and an IRA, for example, they may not withdraw $100,000 from...