Additional Exemptions from Early Distribution Penalty Tax
Typically, participants aren’t allowed to take distributions of retirement funds prior to age 59 ½ without paying a 10% early distribution penalty. There are some exceptions to the 10% penalty such as disability or medical expenses that meet certain requirements. SECURE 2.0 has added more exceptions to the early 10% penalty tax on distributions from retirement accounts. Below are some of the additional instances where the penalty tax will no longer apply:
- Emergency Personal Expenses – Distributions of up to $1,000 for the purpose of paying emergency personal expenses. Emergency personal expenses are defined as unforeseeable or immediate financial needs related to personal or family emergency expenses. These distributions may be repaid within a three-year period following the date of distribution. These distributions are limited to once per year. If a participant has received an emergency personal expense distribution in the past three years and it wasn’t repaid an additional distribution will not be allowed. This provision is effective beginning in 2024.
- Qualified Birth and Adoption Expenses – The original SECURE Act allowed distributions of up to $5,000 for qualified birth and adoption expenses to be exempt from the 10% early distribution penalty tax. It also allowed these distributions to be repaid to an IRA or other retirement plan. SECURE 2.0 limits the repayment of these distributions to a three-year period. This provision was effective immediately and is retroactive.
- Domestic Abuse Victims – Individuals who are the victim of domestic abuse are allowed to receive the lesser of $10,000 or 50% of the individual’s retirement account balance penalty free. Individuals are eligible to repay these distributions within a three-year period. This provision is effective beginning in 2024.
- Terminally Ill Individuals – If an individual has been certified by a physician as having an illness/condition that can reasonably be expected to result in death within 84 months or less they are able to withdraw money from their retirement accounts penalty tax-free. The amounts received are also able to be repaid within three years of the distribution. This provision is effective for distributions made after December 29, 2022.
There are many more provisions contained in SECURE 2.0 that will have an impact on retirement accounts. We will continue to highlight more changes in articles to come. If you have any questions on how this may affect you or your plan, please reach out to Nicole Brown or Cole Hegstad at SDK and they will be happy to assist you!