If you take a taxable withdrawal from your IRA or 401(k) (or other company plan) before age 59 ½, you normally have to pay a 10% penalty in addition to taxes. But Congress continues to carve out exceptions to this penalty, and there are now 20 available. In Notice 2044-55, the IRS recently gave us guidance on the new SECURE 2.0 penalty exceptions for withdrawals from IRAs and workplace plans to pay emergency expenses and for victims of domestic abuse. Both are effective this year. (Always think twice about withdrawing from your IRA or company plan. Even if the withdrawal is penalty-free, it reduces the funds available to you at retirement and may be taxable.)
The exception for emergency expense withdrawals covers any “unforeseeable or immediate financial need relating to necessary personal or family emergency expenses.” But this exception won’t be of great help. Only one penalty-free withdrawal per calendar year is allowed, and each distribution is limited to $1,000. Also, once a withdrawal is made, you may not be able to take another one for the next 3 calendar years. You can get around that rule by either fully repaying the previous withdrawal or, after taking the first withdrawal, replenishing your retirement account by making contributions at least equal to the amount of the first withdrawal. Emergency expense withdrawals can be repaid within 3 years to an IRA or workplace plan.
Company plans aren’t required to offer emergency withdrawals. If yours does not and you have an emergency expense, you can take a hardship withdrawal from the plan (if offered) and treat it as a penalty-free emergency withdrawal by claiming the 10% exception on Form 5329. If your plan does offer emergency withdrawals, the plan is allowed to rely on a statement from you certifying that you’re eligible.
What if you have an emergency expense that exceeds $1,000, or you can’t wait 3 years to take a second withdrawal? You can always tap into your IRA at any time or take a hardship withdrawal from your workplace plan (if your plan allows them). But if those withdrawals are from pre-tax funds and you’re under age 59 ½, you’ll have to pay the 10% penalty in addition to taxes (unless another penalty exception applies).
The penalty exception for withdrawals by domestic abuse victims applies to victims of “physical, psychological, sexual, emotional, or economic abuse” by a spouse or domestic partner. To qualify, the withdrawal must be taken within one year of the abusive act. The amount available is more generous than for emergency withdrawals. Up to $10,000 (as indexed for inflation), but no more than 50% of the IRA or vested plan account value, can be taken. Like emergency expense withdrawals, domestic abuse withdrawals can be repaid within 3 years. Plans aren’t required to allow domestic abuse withdrawals, but if they are offered, employees who self-certify to the plan that they meet the eligibility requirements will automatically qualify.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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