Retirement Plans

The KETRA (Katrina Emergency Tax Relief Act of 2005) includes many provisions for the withdrawal of retirement plan funds for qualified individuals who are victims of Hurricane Katrina. These provisions take away many of the negative tax effects of taking an early withdrawal from a retirement plan. It allows victims to have access to funds they desperately need without negative repercussions.

Penalty Free
The first provision is for the penalty free withdrawal of retirement plan funds. Up to $100,000 in qualified early withdrawals from a qualified plan are not subject to the 10 percent penalty tax. A qualified withdrawal is a distribution made from an eligible retirement plan.

An eligible retirement plan is any one of the following:

  • IRA
  • Individual retirement annuity under Code Sec 408(b) other than an endowment contract
  • 401(a) qualified trust
  • 403(a) qualified annuity plan
  • 457(b) eligible deferred compensation plan maintained by a governmental employer (457 plans maintained by a nongovernmental agency do not qualify)
  • 403(a) annuity contract


    • Eligible retirement plans must be made on or after August 25, 2005 and before January 7, 2007; made to an individual whose principal place of residence on August 28, 2005 was located in the Hurricane Katrina disaster area; and made to an individual who sustained an economic loss due to Hurricane Katrina.

    The $100,000 provision limitation is the total amount of qualified Hurricane Katrina distributions that can be taken for all years. Additionally, the mandatory 20 percent withholding on retirement plan distributions does not apply to qualified Hurricane Katrina distributions.

    Income Averaging
    The second provision allows for income averaging of qualified Hurricane Katrina distributions. Instead of claiming the total distribution on the tax return in the year of withdrawal, taxpayers will be able to average the distribution equally over a three year period. This provision is automatic and taxpayers will need to elect out of it. As of right now, there is no guidance on how taxpayers will elect out, but it appears they will simply include the entire distribution on the tax return in the year of withdrawal. Income averaging will help alleviate the income tax burden of claiming the total distribution in one year. The three year income averaging calculation will be done on a new form, Form 8915.

    Repayment Contributions
    The third provision allows for qualified Hurricane Katrina distributions to be recontributed to eligible retirement plans or IRAs tax free. Any individual that received a qualified Hurricane Katrina distribution can make repayment contributions to an eligible retirement plan at any time during the three year period beginning the day after the distribution.

    The number of repayment contributions they can make is not limited, as long as they are made within the three year time frame and do not exceed the amount of qualified Hurricane Katrina distributions. If distributions are repaid, there will not be any income tax on the distributions. This would make the three year income averaging unnecessary.

    From December 2005

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