401(k) rules may be eased

Katrina's Wake

September 13, 2005|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Victims of Hurricane Katrina would be able to tap into 401(k)s and individual retirement accounts without penalty under a tax-relief package proposed by a Senate committee yesterday.

The Senate Committee on Finance unveiled a broad package of tax breaks for workers and their employers, as well as individuals who take victims displaced by Katrina into their homes. Congress is expected to move quickly on the package, said Sen. Chuck Grassley, the Iowa Republican who chairs the committee.

Congress loosened some retirement plan rules for those who lost family members in the Sept. 11 attacks, experts said. But waiving the 10 percent early withdrawal penalty on retirement accounts would be a first.

Companies and groups involved in the retirement plan industry began lobbying for a loosening of the retirement account rules shortly after Katrina struck the Gulf Coast. Among them is Baltimore-based T. Rowe Price Associates, which administers 401(k) plans with 132,000 participants in Louisiana, Alabama, Mississippi and Florida.

"For many Americans, their 401(k) ... is their only savings," said Deborah Novotny, vice president of T. Rowe Price Retirement Plan Services. "In time of need, they are thinking, `Where can I go?' "

Workers under age 59 1/2 typically must pay a 10 percent penalty for early withdrawals from an IRA, 401(k) and similar accounts. Under the tax relief proposal, the penalty would be waived for those whose primary residence is in an area declared a natural disaster site by the federal government.

They still would owe regular income tax on the withdrawals, but they could spread the payment over three years. And those making such hardship withdrawals would be allowed to put the money back in their retirement accounts within three years without worrying about exceeding annual contribution limits.

The loan limits on 401(k)s would also be doubled to 100 percent of the account balance or $100,000, whichever is less.

Hoping for waiver

Sarah Simoneaux, president-elect of the American Society of Pension Professionals & Actuaries and a resident of suburban New Orleans, said friends and family members have been wanting to dip into their retirement accounts for short-term needs. They had been hoping for a waiver of penalties and the flexibility to put the money back into the account, she said.

"Every one of them said this is only temporary. We just want the money for a month or two," said Simoneaux, who recently evacuated with her family to Houston.

For example, some victims are waiting for insurance checks.

Still, as well-intentioned as the retirement account provisions are, they may not help some of the most vulnerable, said Mark Luscombe, a principal with CCH Inc., a tax information provider in Illinois.

"Most of the people affected are very poor and typically don't have a lot of money sitting around in 401(k)s and IRAs," Luscombe said.

These victims, though, might benefit from other provisions in the proposed package, such as those that encourage donations, he said.

Among proposals

Among the other proposals:

Taxpayers this year will receive a $3,200 personal exemption. Those housing Katrina victims for at least 60 days would be entitled to an additional $500 exemption for each displaced person living with them, but not to exceed $2,000.

Right now, employers can take tax deductions for salaries paid to workers. But employers in the Katrina disaster zone would get a tax credit of 40 percent of the wages paid, up to $6,000, between Aug. 28 and Dec. 31. A credit reduces the bottom-line tax bill dollar for dollar, making it better than a deduction.

Farmers, ranchers and food producers would be encouraged to donate food through an enhanced deduction.

Charitable deduction limits for corporations would be temporarily increased.

The mileage rate that individuals can deduct when using their own vehicles for charitable work would be raised from 14 cents per mile to half the amount of the standard business mileage rate, which is set annually by the IRS. That rate recently was raised by 8 cents to 48.5 cents per mile because of rising gas prices.

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