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Katrina victims may get 401(k) break
Lawmakers and IRS likely to make early withdrawals less costly, and loan provisions more generous.
September 13, 2005: 12:46 PM EDT

NEW YORK (CNN/Money) – Restrictions on making early 401(k) and IRA withdrawals may be eased for Hurricane Katrina survivors, possibly as early as this week.

On Monday, the Senate Finance Committee proposed a tax-relief package that would waive the 10 percent penalty tax on 401(k) withdrawals made by Katrina victims if they're under 59-1/2.

In addition, the Finance Committee proposed easing restrictions on 401(k) and IRA loans, such as doubling the allowable limit loans one could take to the lesser of $100,000 or 100 percent of an individual's account balance.

The Senate package would also make it easier for businesses and individuals to make tax-advantaged charitable contributions to aid with Katrina relief. For instance, it would allow withdrawals from traditional IRA to be made tax-free if they're used as a charitable contribution.

And the proposal would make employers who hire Katrina survivors eligible for a tax credit, and offers additional deductions to individuals who house survivors. Specifically, it would let taxpayers who house evacuees in their principal residence for a minimum of 60 days to take an additional personal exemption of $500 per displaced person, up to a maximum of $2,000.

Separately, the IRS is also expected to ease rules regulating hardship withdrawals and loans in 401(k)s, and to make it easier for companies to amend their plans to allow for these types of distributions, if they don't have those provisions already, said Ed Ferrigno, vice president of Washington affairs for the 401(k)/Profit Sharing Council of America.

Ferrigno is expecting to see those changes made as early as this week.

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The IRS has already instituted a number of other tax relief measures for Katrina victims. To see them, click here.

For a look a Labor Department job network service for Katrina victims, click here.

For more news on proposed changes in 401(k) plans, click here.  Top of page

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