The Internal Revenue Service (IRS) recently issued guidance on two new exceptions to the tax on early distributions from certain eligible retirement plans. This guidance, outlined in Notice 2024-55 (IR 2024-170, 6/20/2024), addresses changes introduced by the SECURE 2.0 Act of 2022, which amended the rules under Code Sec. 72(t)(2).
Early Distribution Penalty
Under Code Sec. 72(t)(1), early withdrawals from qualified retirement plans are typically hit with a 10% penalty. An early distribution occurs when a taxpayer takes money out before reaching age 59 1/2. However, there are exceptions outlined in Code Sec. 72(t)(2) where this penalty doesn’t apply. It’s crucial to understand that while these exceptions eliminate the 10% penalty, the withdrawn amount is still subject to both Federal and state income taxes.
New Exceptions under the SECURE 2.0 Act
The SECURE 2.0 Act of 2022 introduced two new exceptions to the 10% early distribution penalty. These exceptions allow taxpayers to take early distributions penalty-free in the following situations:
- Unforeseen or Immediate Personal or Family Emergency Expenses
- Victims of Domestic Abuse
Guidance on Early Distributions for Emergency Expenses
Notice 2024-55 provides detailed guidance for taxpayers taking early distributions from eligible retirement accounts to meet emergency expenses. Key points include:
- Definition of Emergency Personal Expense Distributions: The notice defines what qualifies as an emergency personal expense, specifying that it must be an unforeseeable or immediate financial need.
- Eligible Plans: Qualified defined contribution plans (including section 401(k) plans), section 403(a) annuity plans, section 403(b) plans, governmental section 457(b) plans, or IRAs are eligible to permit emergency personal expense distributions.
- Limitations on Distributions: The guidance describes both the dollar amount and frequency limitations on receiving emergency personal expense distributions.
- Repayment Option: Individuals who receive emergency personal expense distributions are permitted to repay these distributions to certain plans.
Guidance on Early Distributions for Victims of Domestic Abuse
For taxpayers who are victims of domestic abuse, the notice provides the following guidance:
- Definition of Domestic Abuse Victim Distributions: The notice defines who qualifies as a victim of domestic abuse and what constitutes domestic abuse.
- Eligible Plans: IRAs and certain retirement plans that are not subject to spousal consent requirements are eligible to permit domestic abuse victim distributions.
- Dollar Limitation: The guidance describes the dollar limitation on receiving domestic abuse victim distributions, with the amount indexed for inflation.
- Repayment Option: Domestic abuse victims are permitted to repay these distributions to certain plans.
Future Regulations and Call for Comments
Notice 2024-55 also announced that the IRS plans to issue regulations regarding the 10% early distribution tax. The IRS is seeking comments on the tax, its exceptions, and the distribution repayment provisions. Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55.
The new guidance provided by the IRS offers clarity and assistance to taxpayers facing emergency expenses or domestic abuse, allowing them to access their retirement savings without incurring a penalty. This is a significant step in providing financial relief and support to individuals in urgent need. The Elder Law attorneys at Mandelbaum Barrett PC are available to answer any questions you may have.