Consider IRA, 401(k) early withdrawalThey serve well as solid source of cash Sunday, October 30, 2005 Mary Judice Last week I wrote about sources of cash that are readily available as you struggle to meet daily needs and other financial obligations. Of all the sources I mentioned, the one that has drawn the most comments -- and questions -- is the early withdrawal from a qualified retirement plan like an Individual Retirement Account or a workplace-based 401(k) plan. As one reader put it, it's her largest investment and she would rather tap it than take on debt because her company is closing and she will soon be out of a job. And she's not alone, as unemployment numbers indicated this week. So what are the particulars of borrowing from these types of retirement vehicles? It all boils down to which source of funds you will tap. In hurricanes' wake The Katrina Emergency Tax Relief Act of 2005 makes special provisions for those taking money out of their individual retirement accounts in the wake of the hurricanes. Meanwhile, separate provisions by the Internal Revenue Service make it possible for employees, regardless of where they live, to take money out of qualified company plans, including 401(k) plans, to help relatives living in hurricane-affected areas, said Ed Slott, an IRA specialist from The emergency tax act allows you to withdraw money from your IRA without paying a penalty for taking funds out before the age of 59 ½ if you are in the disaster area. To make a withdrawal under the new provisions, which already have gone into effect, go to your employer or the bank or brokerage that serves as the custodian of your account. You will be able to withdraw up to $100,000 from your IRA. To qualify, your principal residence must be in the Katrina disaster area and you must have suffered an economic loss. The withdrawal could have been made beginning Aug. 25 and the time frame extends to Jan. 1, 2007. As a withdrawal, you do not have to pay the money back but it is taxable. However, if you decide to repay the money to bolster your retirement savings, you will be able to obtain a refund of the taxes paid by filing an amended return. And you could repay it under a lenient plan, which allows three years to get all of the money back into the plan. The clock starts ticking the day after you make the withdrawal. If you choose not to repay the funds, you must pay income taxes on the distribution. That's because when you first take the distribution, you will not have 20 percent withheld for taxes, which is standard under most plan distributions. You will have three years to pay the taxes using a method that spreads the income over three years. Relatively speaking Let's now consider the case of employees who want to take money out of their retirement plans for relatives impacted by the hurricanes or employees in the disaster area who want to withdraw from their own company plans for their own needs. Under new rules issued by the IRS, plan administrators can take the word of the employee about the hardship of relatives instead of having to verify it themselves. And the loan can be made even if the plan's rules don't normally provide for such emergency distributions. When you take money out of your retirement fund under these special IRS provisions, you have the same lenient penalty-free withdrawals if you live in the disaster area and the same lenient repayment and tax advantages as with an IRA. But if you live outside the affected area you could be subject to a 10 percent early withdrawal penalty, if applicable. And if you had a loan balance from a company plan on Aug. 25 or took out a loan you would have a payment deferral for one year. Randy Spinosa, a Mandeville accountant, said those with financial problems who are considering filing for bankruptcy protection should weigh the pros and cons of taking money from retirement accounts. Assets in qualified plans are protected from creditors in a bankruptcy, he said. He said other loan options should be explored, including bank loans and low-interest loans from the Small Business Administration, which may take a while to obtain and which of course would have to be repaid. Experts said age may also be a factor in deciding which course to take. For those years from retirement, these retirement plan distributions and loans may not be as appealing because they will lose the benefit of tax-deferred compounding. For a list of counties and parishes eligible for the retirement fund relief, go to Slott's Web site, www.irahelp.com. And to correct a point from last week. The federal tax extension for those in the Hurricane Katrina disaster area is effective for tax returns, tax payments or tax deposits due on or after Aug. 29, and in Florida where Hurricane Katrina first hit, beginning Aug. 24. For those in the Hurricane Rita disaster area, the effective date for relief begins Sept. 23. The relief act gives you until Feb. 28 to make tax payments to the IRS. . . . . . . . Mary Judice can be reached at mjudice@timespicayune.com or (504) 826-3496. |
Sunday, October 30, 2005
Katrian and Rit Victums - Consider IRA, 401(k) early withdrawal as possible cash source option
Insurance, finance questions raised by strom
Insurance, finance questions raised by stormSunday, October 30, 2005 THE ANSWER SPOT EDITOR'S NOTE: This column marks the debut of the Answer Spot, an occasional feature that will address your post-Katrina questions. To submit a question, e-mail it to insurance@timespicayune.com FEMA FEMA issued me $2,300 to cover three months of rent on the apartment I rented after evacuating. I'm using the money to pay rent for September, October and November. I've heard that this rent money can be renewed. How can I renew it? What documentation will FEMA require for ongoing grants? Call the FEMA help line at (800) 621-3362 and ask the operator to put you through to recertification. Be prepared to explain where you are in the rebuilding process and why you need additional assistance. The operator will provide you with a number to fax your rental receipts to. FEMA will then verify those receipts and determine how much money, if any, to award you. FEMA is most likely to pay the additional rent to families who can demonstrate that they are making progress in rebuilding their lives. Families that have already begun repairing their homes but still need to stay in a separate rental unit, for example, are the best candidates for such a renewal. What's the purpose of the FEMA inspection and what will it mean to my life? When the FEMA inspector arrives, he or she will want to look at the damages your property has sustained. He will write down information about the damage he sees, but he will not be able to comment about whether or not you are eligible for disaster assistance. You will receive a letter from FEMA after the inspection that tells you what you are eligible for. Any insurance companies you file claims with have a similar inspection process. The purpose of these inspections is to determine what assistance you are eligible for. DEMOLITION/REBUILDING Will FEMA pay to demolish my home? If not, will FEMA provide any grants that I can use to pay for demolition? No. And no. If homes present an imminent threat to public health and safety, FEMA's public assistance program may provide money to local governments to cover the cost of demolition. However, FEMA provides no direct demolition assistance to homeowners. What is ICC coverage? If your home or business is damaged by a flood, you may be required to rebuild your home according to new building requirements that call for a higher elevation. For that reason, all National Flood Insurance Program policies include Increased Cost of Compliance (ICC) coverage that covers the cost of raising your home. If a home is substantially damaged -- defined as damage exceeding 50 percent of its pre-storm market value -- it must meet any new flood elevation levels set by federal authorities since your home was built. Once local officials determine that a home was substantially damaged, the homeowner will be notified that they must comply with the new flood elevation requirements. Then the homeowner may file a second claim with their flood insurance company to get up to $30,000 toward the cost of raising the structure to that higher elevation. An insurance adjuster will determine the exact cost to raise the structure and how much will be paid. ICC coverage can also be used to demolish a structure and build a new one at the higher elevation. However, all flood insurance policies pay out a maximum of $250,000. So even if you are deemed eligible for a $30,000 ICC payout, you won't get it if you've already received $250,000 worth of damages through your policy. Before Katrina struck, FEMA was in the process of updating flood maps of the SBA After applying for FEMA assistance, I got an SBA loan application in the mail. I don't want to take out a loan. Should I just throw the application out? No. The SBA does offer loans but it also refers some applicants back to FEMA for additional assistance. If you throw the application out, you're taking yourself out of the loop for additional assistance. SBA representatives are urging everyone who receives a loan application to fill it out and return it as soon as possible. How long do I have to file for an SBA disaster loan to cover damages, and what are the terms of the loan? The deadline for filing for disaster loans covering physical damages has been extended from Oct. 28 to Jan. 11, 2006. These loans are available to individuals and businesses to cover repairs to a primary residence or building, or replace personal property or inventory. For repairs to a primary residence, loans are made up to a maximum of $200,000, and for contents replacement a homeowner or renter may get a loan up to $40,000. Loans to businesses and nonprofits to cover physical damages can go as high as $1.5 million. These SBA loans have terms up to 30 years and interest rates as low as 2.68 percent for homeowners and 4 percent for businesses. The rates may be higher if the borrower has access to credit elsewhere. As of Thursday, a total of 1,389 loans had been approved for For information on these loans call (800) 659-2955 or go to www.sba.gov/disaster. Can I use money from my SBA disaster loan to pay off my mortgage? The SBA does sometimes offer mortgage assistance -- in the form of mortgage refinancing -- to homeowners who have applied for disaster loans. If the SBA determines that a loan applicant meets the agency's criteria for mortgage refinancing, and the SBA discovers that mortgage refinancing is necessary to make the disaster loan affordable, then refinancing may be offered. When the SBA offers mortgage refinancing, it is part of the disaster loan but is offered in addition to money provided for the actual repair or rebuilding of the home. SBA applicants don't need to fill out any extra forms to be considered for mortgage refinancing. The SBA reviews every application to see whether mortgage refinancing should be offered. Applicants who are determined to be eligible for refinancing will be told by their SBA loan officer and will know in advance that refinancing will be offered as part of the overall loan. What is the deadline for businesses to file for an SBA disaster loan for economic injury? Businesses can apply for SBA disaster loans that cover economic injury as well as physical damage. The deadline for applying for an economic injury loan to cover loss of business or to help meet business expenses while starting back up is May 29, 2006. The loans are issued at a maximum of $1.5 million, extend up to 30 years, and have an interest rate of not more than 4 percent. As of Thursday, 40 loans had been approved for For information on these loans call (800) 659-2955 or go to www.sba.gov/disaster. HANDLING THE MONEY I finally got my insurance check, but it's made out to both me and my mortgage company. What does this mean? Who gets to cash it? You get to cash it. But first both you and your mortgage company must endorse the check. This is the insurance company's way of protecting the interests of both you and the entity that holds the lien on your home. Requiring the mortgage company to endorse the check insures that that company knows what has happened to the home and what insurance money has been made available. You'll need to contact your mortgage company to make arrangements for their endorsement. What are the local bank policies on when and whether people can access their safe deposit boxes at heavily damaged bank branches? Several banks in the metro area had branches that were heavily flooded, leaving their safe deposit box vaults damaged and unavailable to customers. The banks have moved the damaged boxes from these branches to another location and will offer customers the opportunity to go into the branch and reclaim the property. In many cases, you must schedule an appointment to gain access to the deposit box. For specific information on the branch you bank at, visit your bank's Web site or call the bank directly. Safe deposit boxes are not waterproof, so if your box was damaged its contents may be damaged. Neither the bank nor the Federal Deposit Insurance Corp. insures the contents of these boxes, so you should file a claim on any property damaged in your box with your homeowners insurance. You can have any savings bonds that were stored in your box and damaged in the hurricane replaced. To do this, go to the government Web site www.publicdebt.treas.gov/sav/sav.htm. You can also do this by contacting the Federal Reserve Bank, Pittsburgh Branch, If you kept certificates of deposit in your box and they were damaged, your bank will be able to generate a printout summarizing your holdings. I've completed all the paperwork for my insurance claims. Where is my insurance check? What's the holdup? Insurers say some checks have been delayed because evacuees keep moving without notifying their insurance company of their new address and phone number. In other cases claims have been delayed by the slow pace of clearing debris from hard-hit neighborhoods. However, the state's biggest homeowners insurance underwriters, State Farm and Allstate Corp., said they are making steady progress on processing more than half a million claims that have been filed so far. Allstate has closed 50,000, or 21 percent, of the 237,000 claims filed in connection with hurricanes Katrina and Rita, company executives and a spokesman said. Similar numbers weren't available from State Farm, said spokesman Fraser Engerman, who added, "We are issuing checks every day." State Farm and Allstate handle 50 percent of the state's property insurance market, according to the state Insurance Commission. State Insurance Commissioner Robert Wooley said the quickest payments are coming from flood insurance underwriters who are using aerial photographs to assess property damage rather than visiting each site on foot. Underwriters operating through the federal government's National Flood Insurance Program have paid out $3 billion in claims thus far, said Coast Guard Cmdr. Brendan McPherson, a spokesman for the Federal Emergency Management Agency's joint field office in INSURANCE Our insurer made what is a ludicrous request of us. They called and requested that we go to our former home to clear passages for their adjusters. They said that the adjusters cannot measure inside the house because of the 'obstacles' (refrigerator turned upside down, living room furniture on the bed), etc. Here we are: I am 65 and only recently released from the hospital, and my 64-year-old wife who is recovering from heart surgery, and they want us to clear them a path? How far do I have to go to accommodate an adjuster? You should take whatever reasonable steps requested to make your property available for the adjuster. Cooperating is in your best interest because it insures that you will receive the most accurate assessment of your damages. However, you shouldn't be expected to do anything beyond your physical limitations. Call your insurance company back and explain your limitations. If you are unable to work out a solution with your insurance company, contact the state Department of Insurance. The agency will contact the insurance company on your behalf and ask for an explanation of how the claim is being handled. The state Department of Insurance can be reached at (800) 259-5300 or (225) 342-1258 or www.ldi.state.la.us. Will my insurance cover losses to the contents of my home? Probably. Your homeowners policy should cover damage to personal property, or the contents of a home. Under a homeowners policy, so-called 'contents coverage' is linked to the value of the building that is insured, and you automatically have contents coverage equal to 50 percent of the dwelling's value. Your federally issued flood insurance policy also may cover some of your contents. However, contents coverage is not automatically included on a flood policy. You must have made a conscious election to have your flood policy cover contents losses. If you can't remember whether you elected to have contents coverage on your flood insurance, look at your policy. The declaration page should indicate whether you have coverage on both the building and the personal property inside, or on just the building. If you don't have a copy of your policy, call your insurance agent. If you have contents coverage under both your homeowners and flood policies, file claims under both plans simultaneously. You will have to work separately with your flood and homeowners policy adjusters to see what is covered by each plan. My insurance doesn't cover all of the personal property I lost in my home. Will FEMA offer grants to people who don't carry enough insurance to cover all of their contents losses? Yes. FEMA issues grants for "other needs assistance." This type of assistance covers a handful of essential disaster needs, including medical and dental costs, transportation fees and, yes, losses from the contents of your home. It is awarded as part of the financial assistance package you or your family may receive. If you haven't already applied for this financial assistance package, you can do so by calling (800) 462-3362. You can also apply online by going to www.fema.gov. However, if you have insurance you should first work through your insurance claims and provide FEMA with a copy of the decision letter (settlement or denial) from your insurer. FEMA will then call for an inspection of your property. If you qualify for FEMA assistance, the agency will send you a letter outlining how you are to use the money. All FEMA aid is issued in grant form. I've learned my lesson and I now want to make sure that my flood insurance policy covers the contents of my home. How much does contents coverage cost? The premium on contents coverage can be higher than on building coverage and in many cases will double the cost of your flood policy. Here is how your premium is figured: If your building was built before the federal flood plain maps were drawn for your area, you would pay a flat fee. The map for Orleans Parish was drawn in 1984; the Jefferson Parish map was drawn in 1995. The graduated rate begins at 76 cents per $100 of coverage for building coverage and 96 cents per $100 of coverage for contents coverage and declines as more coverage is added. If your home was built after the maps were drawn, the rate depends on the building construction and whether the bottom floor is above or below sea level. For example, a building one foot below flood level would bear a top rate of $2.70 per $100 of the building's value. The contents would be calculated at a graduated rate that begins at $3.01 for every $100 in value. Like other insurance policies, the federal flood policies have separate deductibles for building and contents coverage. The deductibles range from $500 to $5,000. I feel like my insurance company is not treating me fairly. What are my options for appeal? If you are unable to work something out with the company, you can file either an electronic or a written complaint with the state department of insurance. The agency will contact the insurance company on your behalf and ask for an explanation of how the claim is being handled. The state Department of Insurance can be reached at (800) 259-5300 or (225) 342-1258 or www.ldi.state.la.us. You also have the option of invoking the appraisal clause in your policy. This is the portion of your policy that provides an avenue for working to settle disputes between you and the insurance company. Each party (you and your insurance company) chooses an appraiser to review the damage. If the two appraisers cannot agree, a third person called an umpire is selected. You are not bound by the decision of the umpire, and you still have the option of hiring an attorney if all other attempts to resolve the matter are exhausted. Keith Darcé, Mary Judice, Ronette King, and Kim Quillen, all of the Money staff of The Times-Picayune, contributed to this feature |
