IRS Grants Tax Favored Treatment for Early Distribution of Retirement Funds

Taxpayers who suffered losses resulting from Hurricane Katrina are being advised by the Internal Revenue Service (IRS) to be aware of recent changes in tax law providing for tax-favored withdrawals, reconstitutions and loans from certain retirement plans.


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Individuals affected by Hurricane Katrina taking qualified distributions between August 25, 2005 and January 1, 2007 from eligible retirement plans will not have to pay the 10 percent additional tax on early distributions. Total combined distributions are limited to $100,000.

Distributions are generally included in income and can be included ratably over three years. If the amount of the distribution is re-contributed to an eligible plan within three years, the distribution is treated as a rollover. In addition, qualified Hurricane Katrina distributions are not subject to the mandatory 20 percent withholding.

Loans made from a qualified employer plan to an eligible individual between August 25, 2005 and January 1, 2007 should not be treated as a taxable distribution unless it exceeds a certain dollar limit. The dollar limit is the lesser amount of either subtracting the highest outstanding balance of loans from the plan in the previous from $100,000 or the individual’s vested benefit under the plan.

Additionally, individuals taking hardship or first-time homebuyer distributions from qualifying plans between February 28,2005 and August 29, 2005 to purchase or build a home in the disaster area that was not purchased or built as a result of Hurricane Katrina could re-contribute the funds to the plan without consequence between August 25, 2005 and February 28, 2005.

The IRS is drafting Form 8915, Qualified Hurricane Katrina Retirement Plan Distributions and Repayments, which will be used by taxpayers to report distributions and determine the amount included in income. The IRS is also in the process of issuing guidance on the tax favored treatment distributions from retirement plans as they apply to taxpayers affected by Hurricane Katrina.

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