The new Pension Protection Act of 2006 makes it easier for active-duty reservists to use their 401(k) and IRA funds to bolster their living expenses. The law allows those reservists who have been called back to active duty to use funds without paying the 10 percent penalty tax on top of income taxes owed.

Of course, you’ll still have to pay the regular income tax on the cash. But at least you don’t have to pay the extra 10 percent penalty.

The bigger problem is that active-duty reservists typically aren’t making their normal income while back on the Armed Forces’ payroll. While their job is being held open (that’s what the law says), they’re not collecting their regular paycheck, but one from Uncle Sam. Often it’s lower — a lot lower.

But just because your pay is cut in half or by a third doesn’t mean your expenses have been cut. So, reservists have been digging into their retirement funds to make ends meet. What a happy scenario.

According to the IRS, the Pension Protection Act of 2006 allows eligible reservists activated after Sept. 11, 2001, and before Dec. 31, 2007, to qualify for relief from this tax.

Because this relief is retroactive, eligible reservists who already paid the 10-percent tax can claim a refund by using Form 1040X to amend their return for the year in which the retirement distribution was received. Eligible reservists should write the words, “active duty reservist,” at the top of the form. In Part II Explanation of Changes, the reservist should write the date he or she was called to active duty, the amount of the retirement distribution and the amount of early-distribution tax paid.

Read the whole release here: