The Internal Revenue Service (IRS) recently issued Notice 2024-55, providing guidance on new exceptions to the 10% additional tax on early distributions from retirement plans. This notice is part of the SECURE 2.0 Act of 2022, which aims to make retirement savings more accessible and flexible for you if you are facing unforeseen financial challenges.
What is the 10% Penalty?
Typically, early distributions from retirement plans, such as 401(k)s and IRAs, are subject to a 10% additional tax if taken before the age of 59½. This penalty is intended to discourage you from using your retirement savings prematurely.
New Exception to 10% Penalty for Emergency Personal Expenses
Under Notice 2024-55, the IRS has introduced an exception to this penalty for distributions taken to cover emergency personal expenses. This exception to 10% penalty allows you to access your retirement funds without incurring the 10% penalty, if you met certain conditions.
Key Points of the Exception
- Definition of Emergency Personal Expenses: The notice describe emergency personal expenses as unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. An emergency personal expense distribution is includible in gross income, but it is not subject to the 10 percent additional tax under IRC section 72(t)(1).
- Unforeseeable financial expenses: Are those expenses that are related, but not limited to medical care, accident or loss of property due to casualty, imminent foreclosure or eviction from a primary residence, the need to pay for burial or funeral expenses, auto repairs, or any other necessary emergency personal expenses.
- Eligible Plans Examples: 401(k) plans, 403(a) annuity plans, 403(b) plans, governmental 457(b) plans, IRAs are eligible to permit these distributions.
- Limitations: There are limitations on the dollar amount and frequency of these distributions. For instance, you can only treat a distribution as an emergency personal expense once every three calendar years unless you fully repay the previous distribution or your contributions to the plan equal the amount of the previous distribution.
- Repayment Option: If you take emergency personal expense distributions, you are permitted to repay these amounts to certain plans, allowing you to restore your retirement savings.
Impact of the New Exception
In summary, this new exception provides a safety net for you if you are facing unexpected financial hardships, allowing you to access your retirement savings without the added burden of a penalty. Also, it reflects a more flexible approach to retirement savings, acknowledging that emergencies can arise and providing a means to address them without putting at risk your long-term financial security.
Additionally, for more detailed information, you can refer to the full text of Notice 2024-55 on the IRS website.
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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.