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U.S. Master™ Pension Guide, 2009 Edition
Revised for 2009 to include relevant provisions of the Heroes Earnings Assistance Relief Tax (HEART) Act and the Emergency Economic Stabilization Act.

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CCH® PENSION AND BENEFITS — 6/17/08

Treasury official predicts more penalty-free plan withdrawals to be allowed

Penalty-free withdrawals from retirement plans will become more common as lawmakers look for ways to give individuals greater access to their savings to pay for nonretirement needs, according to W. Thomas Reeder, benefits counsel, Office of the Treasury Assistant Secretary for Tax Policy. Reeder spoke on June 4, 2008, at the Profit Sharing/401(k) Council of America’s 2008 Legislative and Regulatory Outlook conference in Washington, D.C.

HEART Act expands penalty-free withdrawals

The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART), currently awaiting signature by the President (see CCH Pension Plan Guide ¶29,153 ), permits military reservists called to active duty to make penalty-free withdrawals from retirement plans, Reeder explained. The funds must be withdrawn from an IRA, 401(k), 403(b), or similar arrangement. Additionally, the reservist must be called to active duty for at least 179 days. This special treatment was originally enacted as a temporary incentive in the Pension Protection Act of 2006 (P.L. 109-280). The temporary provision expired at the end of 2007. Reservists on active duty will still be liable for income tax on the withdrawals, Reeder noted. However, the HEART Act gives reservists up to two years to repay the amounts withdrawn.

Reeder predicted this incentive — allowing individuals to tap tax-deferred contribution plans for purposes other than retirement — will become increasingly common. Before the HEART Act, Congress authorized penalty-free withdrawals from retirement plans for victims of Hurricane Katrina (the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73)). Congress could make the treatment permanent, as it did in the HEART Act, rather than temporary. “There are already many exceptions under Code Sec. 72(t) and there likely will be more,” Reeder said. He noted that lawmakers have discussed allowing homeowners caught in the mortgage and credit crunch to tap their retirement savings penalty-free.