The House and Senate today passed versions of Katrina-related tax-relief packages with identical provisions permitting Gulf Coast residents to make penalty-free early withdrawals from defined benefit and defined contribution plans as well as public-sector deferred compensation plans. A similar waiver would apply to early withdrawals from IRAs.
Those who take early withdrawals would be able to pay the normal income tax on these withdrawals over three years instead of all this year. Also, participants could receive preferential tax treatment on the money they pay back to their plans.
The legislation also permits those who suffered losses in Louisiana, Mississippi and Alabama because of the storm to borrow their entire retirement account balances, up to $100,000, from their employer-sponsored plans. Those who already borrowed from their retirement plans would be eligible for a year's extension on the repayment.
Lawmakers must reconcile differences between the two tax packages before the legislation goes to President Bush for his signature.
Separately, the IRS and departments of Labor and Treasury today announced streamlined procedures to permit defined contribution plan participants affected by the hurricane to receive hardship loans and withdrawals from their plans.
The simplified rules also will permit IRA holders to take early withdrawals from their accounts. To qualify for the relief, the hardship withdrawals must be made by March 31, 2006. In addition, the six-month ban on 401(k) contributions that normally apply to participants who take hardship distributions will be waived.