SECURE 2.0 Adds New Escapes from the 10% Early Withdrawal Penalty

In late 2022, Congress passed the SECURE 2.0 Act, which made several changes to tax-advantaged retirement plans. Many of the changes create new exceptions to the 10 percent penalty on early withdrawals from IRAs and other retirement accounts before age 59 1/2.

Starting in 2024, you will have more options than ever before to withdraw money from a retirement account without penalty. Unfortunately, most exceptions require experiencing something negative, such as a financial emergency, domestic abuse, a terminal illness, or a disaster.

It’s important to note that while these withdrawals will not be subject to the 10 percent early withdrawal penalty, you must pay regular income tax on withdrawals from tax-deferred accounts such as traditional IRAs and 401(k)s. Withdrawals from Roth IRAs held for five years are not subject to income tax.

In 2024, a new emergency personal expense withdrawal exception to the 10 percent penalty will allow you to withdraw up to $1,000 from your retirement accounts in case of almost any type of financial emergency. But you can only do so once every three years unless you pay back the money first.

Starting in 2024, taxpayers who suffer abuse from a spouse or domestic partner may withdraw up to $10,000 penalty-free. Domestic abuse is broadly defined to include physical, psychological, sexual, emotional, or economic abuse.

If you expect to die from a terminal illness within seven years, you can withdraw any amount from your retirement accounts penalty-free—immediately. A doctor must certify your terminal illness.

Starting in 2026, retirement account owners may take penalty-free annual distributions of up to $2,500 to help pay for long-term care insurance for themselves or their spouses.

You can withdraw up to $22,000 from your retirement accounts penalty-free if a federally declared disaster damages your primary residence. This provision is retroactive to January 26, 2021, and applies to all federally declared disasters.

Some of these exceptions can be combined. For example, you could take a penalty-free emergency personal expense distribution and domestic abuse distribution in the same year for a maximum of $11,000. If a federally declared disaster damages your home, you could add up to $22,000. But let’s hope you never experience any of these adverse situations.

If you want to discuss any of the new provisions mentioned above, please reach out to us.

SERVICES WE OFFER RELATED TO THIS TOPIC

The information contained in this post is for general use and educational purposes only.  However, we do offer specific services to our clients to help them implement the strategies mentioned above.  For specific information and to determine if these services may be a good fit for you, please select any of the services listed below. 

Investment Advisory Services are offered through Lifetime Financial, Inc., a Registered Investment Advisory. Insurance and other financial products and services are offered through Lifetime Paradigm, Inc. or Lifetime Paradigm Insurance Services. Neither Lifetime Financial, Inc. nor Lifetime Paradigm, Inc., or its associates and subsidiaries provide any specific tax or legal advice. Only guidance is provided in these areas. For specific recommendations please consult with a qualified, licensed Advisor. Past performance is no guarantee of future results. Your results can and will vary. Investments are subject to risk, including market and interest rate fluctuations. Investors can and do lose money and, unless otherwise noted, they are not guaranteed. Information provided is for educational purposes only and is not intended for the sale or purchase of any specific securities product, service or investment strategy. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER, TAX PROFESSIONAL, OR ATTORNEY BEFORE IMPLEMENTING ANY STRATEGY OR RECOMMENDATION DISCUSSED HEREIN.

This message is intended for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient, any dissemination, distribution or copying of this communication is strictly prohibited. If you think you have received this communication in error, please notify us immediately by reply e-mail or by telephone (800) 810-1736 and delete the original message.

This notice is required by IRS Circular 230, which regulates written communications about federal tax matters between tax advisors and their clients. To the extent the preceding correspondence and/or any attachment is a written tax advice communication, it is not a full "covered opinion." Accordingly, this advice is not intended and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS.