Katrian and Rit Victums - Consider IRA, 401(k) early withdrawal as possible cash source option

Consider IRA, 401(k) early withdrawal They 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 Rockville Centre, N.Y. who publishes a newsletter IRA Advisor. 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.