Katrina Emergency Tax Relief Act of 2005

Taking a loan from a retirement plan
Barney Jones (age 40) is a New Orleans resident and currently unemployed due to Hurricane Katrina. Barney is guessing that he'll need about $75,000 to cover living expenses for himself and his family during a possible lengthy search for a new job, relocation to a new area, a drawn-out insurance settlement, etc. He has enough money in his 401(k) to cover the $75,000. What are his options? He may take a distribution up to $100,000 from his 401(k) without having to pay a 10 percent early distribution penalty. If he does this, he can pay all of the tax on the distribution this year or he can spread it out evenly over tax years 2005, 2006 and 2007. He also has three years to recontribute any or all of the amount withdrawn. If he recontributes an amount on which he previously paid income tax, he can get reimbursed for that tax by filing an amended return.

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