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Retirement Planning > Retirement Investing

Katrina Bill Could Ease Plan Withdrawals And Allow Charitable Rollovers

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Congress is moving to free up retirement plan assets for Katrina survivors and encourage taxpayers to donate individual retirement account assets to Katrina relief efforts.[@@]

Sens. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, and Max Baucus, D-Mont., the most senior Democrat on the committee, today introduced the bill, and House Ways and Means Committee Chairman Rep. Bill Thomas, R-Calif., is preparing to introduce a similar bill.

The number of the Senate bill is not yet available.

Most observers are expecting the Katrina relief package to pass quickly.

The Grassley-Baucus bill would:

- Waive the 10% penalty for early withdrawal of retirement plan funds for individuals from federally declared disaster areas. This provision would apply to individual retirement accounts, defined benefit pension plans, 401(k) plans and 403(b) plans.

Individuals eligible for this waiver because of Katrina would be permitted to pay income tax on such distributions over a 3-year period, according to summary of the bill released by the Senate Finance Committee. Amounts distributed could be re-contributed to a qualified retirement plan over the 3-year period following the distribution date and receive rollover treatment.

Distributions for home purchases which were not finalized because of Hurricane Katrina also could be re-contributed to a qualified retirement plan or IRA.

- Let taxpayers exclude rollovers of IRA assets to qualified charitable organizations from taxable gross income.

The charitable rollover provision would exclude from gross income otherwise taxable IRA withdrawals from either a traditional or a Roth IRA for qualified charitable distributions. Under the provision, taxpayers who are 70 1/2 and older would be allowed to roll over amounts from their IRA accounts directly to a qualified charitable organization on a tax-free basis.

The provision also would allow taxpayers ages 59.5 and older to transfer IRA funds to a charitable remainder trust and give a remainder interest in the trust to charity without tax consequence.

- Raise the permitted individual limit for cash contributions to 60% of adjusted gross income, from 50%, for donations made this year.

- Give the Internal Revenue Service commissioner permission to extend deadlines for filing tax returns and paying income, estate, gift, employment and excise taxes.

The IRS already has issued a notice extending the filing and tax payment period for Katrina survivors until Jan. 3, 2006.

Although the IRS tries to apply the extension to employment and excise taxes, it is not clear that the Internal Revenue Code gives the IRS authority to do so, Grassley and Baucus say in an explanation of their bill.

“This proposal extends the deadlines until Feb. 28, 2006, and clarifies that the extension includes employment and excise taxes in addition to income, estate and gift taxes,” the senators say.


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