IRA Update from Ed Slott

September 29, 2005

 Retirement Plan Relief Provisions Are Signed Into Law and Effective Immediately

Hurricane Katrina Relief Bill Signed Into Law on September 23^rd  

Our government can move swiftly. A bill has been passed by Congress and signed by the President to help victims of Hurricane Katrina. The Katrina Emergency Tax Relief Act of 2005, (KETRA), is essentially a do-it-yourself bill for taxpayers with retirement plans who were affected by the hurricane. In the past those assets have been protected from encroachment, now the government is saying it is up to you to fund your own recovery and it’s ok to use your retirement plan to do that.

Provisions Available to Everyone

Recontributions of Withdrawals for a First Time Home Purchase

An IRA distribution that was exempt from the 10% early distribution penalty or a qualified hardship withdrawal from a 401(k) or 403(b) plan that was distributed between Feb. 28, 2005 and Aug. 29, 2005 for the purchase or construction of a home in the Hurricane Katrina disaster area which has been cancelled due to the hurricane, can be recontributed, tax-free, by Feb. 28, 2006.

Provisions Available to Those in the Disaster Area

The following counties or parishes are considered the Hurricane Katrina disaster area.

Alabama:  Baldwin, Bibb, Choctaw, Clarke, Colbert, Cullman, Greene, Hale, Jefferson, Lamar, Lauderdale, Marengo, Marion, Mobile, Monroe, Perry, Pickens, Sumter, Tuscaloosa, Washington, Wilcox, Winston

Florida:  Bay, Broward, Collier, Escambia, Franklin, Gulf, Miami-Dade, Monroe, Okaloosa, Santa Rosa, Walton

Louisiana:  Acadia, Allen, Ascension, Assumption, Avoyelles, Beauregard, Bienville, Bossier, Caddo, Calcasieu, Caldwell, Cameron, Catahoula, Claiborne, Concordia, Desoto, East Baton Rouge, East Carroll, East Feliciana, Evangeline, Franklin, Grant, Iberia, Iberville, Jackson,  Jefferson, Jefferson Davis, Lafayette, Lafourche, LaSalle, Lincoln, Livingston, Madison, Morehouse, Natchitoches, Orleans, Ouachita, Pointe Coupee, Plaquemines, Rapides, Red River, Richland, Sabine, St. Bernard, St. Charles, St. Helena, St. James, St. John, St. Landry, St. Mary, St. Martin, St. Tammany, Tangipahoa, Tensas, Terrebonne, Union, Vernon, Vermilion, Washington, Webster, West Baton Rouge, West Carroll, West Feliciana, Winn

Mississippi:  Adams, Alcorn, Amite, Attala, Benton, Bolivar, Calhoun, Carroll, Chickasaw, Claiborne, Choctow, Clarke, Clay, Coahoma, Copiah, Covington, DeSoto, Franklin, Forrest, George, Greene, Grenada, Hancock, Harrison, Hinds, Holmes, Humphreys, Issaquena, Itawamba, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lafayette, Lamar, Lauderdale, Lawrence, Leake, Lee, Leflore, Lincoln, Lowndes, Madison, Marion, Marshall, Monroe, Montgomery, Neshoba, Newton, Noxubee, Oktibbeha, Panola, Pearl River, Perry, Pike, Pontotoc, Prentiss, Quitman, Rankin, Scott, Sharkey, Simpson, Smith, Stone, Sunflower, Tallahatchie, Tate, Tippah, Tishomingo, Tunica, Union, Walthall, Warren, Washington, Wayne, Webster, Wilkinson, Winston, Yalobusha, Yazoo

Penalty Free Withdrawals

Individuals can take up to $100,000 from their eligible retirement plans, penalty tax free. To qualify, the distribution must be: 1) from an eligible retirement plan; 2) made on or after Aug. 25, 2005, and before Jan. 1, 2007; 3) to an individual whose principal place of abode on Aug. 28, 2005 is located in the Hurricane Katrina disaster area; and 4) who has sustained an economic loss by reason of Hurricane Katrina. There are no restrictions on what you can use the money for.

Repayments

Funds can be recontributed within 3 years, tax-free. The 3-year period will begin on the day after the date the funds are received. If tax has already been paid on the Hurricane Katrina distribution and the funds are recontributed to a retirement plan, you will be able to file an amended tax return to recover the taxes paid.

Taxes

A Hurricane Katrina qualified distribution is subject to income tax. But there is a 3-year tax averaging provision in the Bill. The income can be spread ratably over 3 years beginning with the tax year in which the distribution is received. Also, qualified KETRA distributions will be exempt from the 20% withholding tax rules.

Plan Loans

The cap on plan loans is doubled to the lesser of $100,000 or the greater of $10,000 or the value of the employee’s benefit. The loan must be made after September 23, 2005 and before January 1, 2007.

An employee with a plan loan outstanding on or after Aug. 25, 2005 is eligible for a one-year postponement of any repayments with a due date of Aug. 25, 2005 to Dec. 31, 2006. The subsequent loan repayments will reflect the deferred payments and any interest that may have accrued during the deferral period. The 5-year loan repayment schedule or the term of the loan will also be adjusted.  

Retroactive Amendments Allowed

KETRA provides for affected retirement plans and IRAs, to operate under these rules as if the plan allowed these provisions. Plans have until the last day of the plan year beginning on or after Jan. 1, 2007 to amend the plan.

IRS Announcement 2005-70

In addition to the KETRA bill, IRS announced its own Hurricane relief provisions in Announcement 2005-70 of Sep. 15, 2005.

The relief in this announcement applies to the following counties or parishes.

Alabama:  Baldwin, Choctaw, Clarke, Greene, Hale, Mobile, Pickens, Sumter, Tuscaloosa and Washington

Louisiana: Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John, St. Mary, St. Martin, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge and West Feliciana

Mississippi: Adams, Amite, Attala, Claiborne, Choctow, Clarke, Copiah, Covington, Franklin, Forrest, George, Greene, Hancock, Harrison, Hinds, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston and Yazoo

The provisions apply to an employee or former employee whose principal residence or place of employment on Aug. 29, 2005 was in one of the above listed counties or parishes or whose lineal ascendant or descendant, dependent or spouse lived or worked in that area. This announcement applies to fewer counties and parishes than KETRA but applies to a broader group of taxpayers. The effective dates and compliance dates also differ from KETRA.

IRS has relaxed the rules regarding hardship distributions from employer plans. The company can rely on the word of the employee as to the need for the hardship distribution and these distributions will be considered as “unforeseeable emergency” distributions and apply to any hardship of the employee.

The maximum hardship distribution is defined in KETRA (see above). Plans do not have to restrict contributions after a withdrawal. Distributions will be subject to income tax, and, if the distribution is not a KETRA qualified distribution, the 10% early distribution penalty, if applicable. A hardship distribution due to Hurricane Katrina must be made on or after Aug. 29, 2005 and no later than Mar. 31, 2006.

The rules apply to any plan that could make such distributions whether or not the plan currently allows them. Plans that do not have loan provisions or hardship distribution provisions must be amended no later than the end of the first plan year beginning after Dec. 31, 2005.

Look for more details in the November, 2005 issue of “Ed Slott’s IRA Advisor”.

By Ed Slott © 2005

Ed Slott’s IRA Advisor 

Subscription is $125/year, 12 issues; monthly.
To order call 800-663-1340 or order on-line at http://www.irahelp.com/order.shtml.

Publisher, Ed Slott's IRA Advisor
100 Merrick Road - Suite 200 East
Rockville Centre, New York 11570
(516) 536-8282

email: slottcpa@aol.com
website: http://www.irahelp.com