When the SECURE 2.0 Act was passed in December 2022, it included changes to the rules specific to employer-sponsored retirement plans and individual retirement plans. Some of the new eligibility rules focus on individuals taking early withdrawals from their retirement savings plans to meet their immediate cash needs.
There are many factors that would lead to an individual taking an early distribution from an employer-sponsored retirement account or an individual retirement account, but when is it a wise decision to do so? A potential answer to this question is whether the reason for the distribution can be considered an exception to the early withdrawal rule. The IRS considers an early withdrawal as any distribution from an employer-sponsored plan or individual retirement plan prior to that individual turning age 59 ½. Withdrawals that do not qualify as an exception will be subject to a 10% penalty on the amount distributed.
SECURE Act – Historically, the most common exceptions to the early withdrawal rule included the following:
- Distributions due to death or disability of the plan participant or account owner.
- Individual retirement account owners are eligible to use up to $10,000 for the purchase of their first home.
- Qualified education expenses as defined as tuition, fees, books, supplies, and equipment required for enrollment or attendance of a student at an eligible institution.
SECURE 2.0 Act – With the recent revisions in the law, the legislature expanded what qualifies as an exception to the early withdrawal rule. The goal is to allow individuals broader access to funds should an unfortunate life event occur. In addition to what historically has been allowed, the following exceptions are included:
- Qualified Distributions for Birth or Adoptions
Individuals are eligible to use up to $5,000 to help cover the cost for each qualified birth or adoption and the distribution must occur within one year of the birth or the legal adoption date. The IRS considers a qualified adoptee to be an individual (does not include the child of the taxpayer’s spouse) under the age of 18 or an individual who is physically or mentally incapable of supporting themselves. - Qualified Disaster Distributions
Individuals with a principal residence within a federally declared disaster area can distribute a maximum of $22,000. In addition, qualified plan participants are eligible to take a loan from their employer-sponsored retirement plan of up to $100,000 or up to 100% of their vested account balance. - Withdrawals for Emergency Expenses
Individuals with an immediate financial need can access up to $1,000 for personal or family emergencies. This is a once-per-year exception to the rule, and the individual does have the option to repay the withdrawn amount within three years. This exception is effective for distributions made after December 31, 2023. - Provision for Domestic Abuse & Terminal Illness
Survivors of domestic abuse will be able to access up to $10,000 or 50% of the account value effective with distributions made after December 31, 2023. For individuals with a terminal illness, any withdrawal qualifies as an exception effective with the signing of the Secure 2.0 Act.
When contemplating using retirement funds, individuals must determine whether an exception applies and if it makes sense to do so. Individuals who are considering taking an early withdrawal should consult with their trusted CPA or CFP® professional to discuss the current list of exemptions and the new provisions added to evaluate the best course of action.
For more information, reach out to a professional at FORVIS Private Client™ or submit the Contact Us form below.
Other Articles in This Series
SECURE 2.0 Act: The Role of Trusted Advisors in an Ever-Changing Retirement Landscape
How SECURE 2.0 Can Help Defined Contribution Plan Participants Access Emergency Funds