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

Ordinarily, you must pay a 10% penalty when you withdraw your money from an IRA or other retirement account before you reach age 59 1/2.

This is in addition to paying the regular income tax in the case of tax-deferred accounts.

But there have always been exceptions.

If you're one of the millions of Americans who'd like to get their hands on their retirement money early, there is good news: The SECURE Act 2.0 passed by Congress in late 2022 adds several more exceptions to the 10% penalty tax on early retirement account withdrawals.

Many of the new exceptions start in 2024.

Unfortunately, most of these exceptions require that something bad happen to you, such as a financial emergency, domestic abuse, terminal illness, or a disaster.

The new law allows you to combine some of the penalty escapes.

For example, you could take a penalty-free emergency personal expense distribution and domestic abuse distribution the same year, for a maximum of $11,000. If your home is damaged due to a federally declared disaster the same year, you could through in an additional $22,000. But let's hope that you'll never be so unlucky.

New Emergency Personal Expense Exception

A new emergency personal expense withdrawal exception to the 10% penalty begins in 2024.

This penalty exception applies to any taxpayer who needs the money "for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses."

This can cover just about anything (within reason). Moreover, you are only required to provide a written certification to the plan administrator that the withdrawal is for an emergency.

Though broadly defined, emergency personal expense distributions are severely limited in amount. You can make only one emergency personal expense distribution per calendar year, for a maximum of $1,000. Hardly enough to deal with most real emergencies.

In addition, once you take your first emergency personal expense distribution, you can't take another in a subsequent year unless:

  • you fully repay the prior distribution,

  • your regular deferrals and other employee contributions made to the plan since the emergency distribution total at least as much as the prior emergency distribution, or

  • three years have passed since the previous emergency personal expense distribution.

In any event, if you need a quick $1,000 for an emergency, you'll know you can always take it out of your IRA.

Domestic Abuse Exception

Staring in 2024, victims of domestic abuse will be allowed to take penalty-free withdrawals from their retirement accounts of up to $10,000 or 50% of their vested balance, whichever is less. The withdrawal must be made within one year of any date during which the abuse occurred. Abuse victims have the option of repaying the money within three years.

"Domestic abuse" is broadly defined to include "physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim's ability to reason independently, including by means of abuse of the victim's child or another family member living in the household. This includes abuse both by a spouse or domestic partner.

Employer plans and IRA custodians will be able to rely on an individual's self-certification that they qualify to receive such a distribution.

Terminal Illness Exception

Starting immediately, individuals with a terminal illness will be able to make penalty-free retirement account distributions of any amount. For these purposes, a terminal illness is one that can reasonably be expected to result in death within 84 months (7 years). A doctor must certify that the individual has such a terminal illness.

The seven-year period for what constitutes a terminal illness is much longer than the normal two-year terminal illness definition under other provisions of the tax law. Such a terminal illness could presumably include, for example, various forms of cancer with a low seven-year survival rate. Just how low the survival rate must be for a disease to be reasonably expected to result in death is unclear.

Such distributions may be repaid within three years, but of course, they don't have to be.

Key point. There has long been an early withdrawal penalty exception for individuals who are unable to work due to a terminal illness. This new exception allows terminally ill people to make penalty-free withdrawals even if they are able to work while they are sick.

Long-Term Care Exception

Starting in 2026. to pay for long-term care insurance, retirement account owners may take penalty-free annual, qualified distributions of up to 10% of their vested balanced or $2,500 (adjusted for inflation), whichever is less.

Such insurance can be for you or for your spouse if you file a joint return.

To qualify for this exception, you must have either paid or been assessed long-term care insurance premiums equal to or greater than the distribution in the year it is made. You'll also need to provide your plan administrator with a "Long-Term Care Premium Statement" with your long-term insurance details.

Disaster Recovery Exception

For many years, Congress has authorized individuals impacted by certain natural disasters such as hurricanes, floods, and fires to withdraw a specified amount of retirement funds without penalty for a limited time. But Congress had to authorize such distributions for each disaster (or series of disasters). All such authorizations had expired as of 2021.

The SECURE 2.0 Act permanently reinstates disaster recovery distributions for all federally declared disasters - Congress no longer has to authorize them after each disaster. The reinstatement is retroactive to disasters occurring on or after January 26, 2021.

To qualify for such distributions, your "principal place of abode" (residence) must be located in a federally declared disaster area, and you must have suffered an economic loss due to the disaster. You must take your distribution within 180 days of the disaster.

Unfortunately, the SECURE 2.0 Act substantially reduces the amount that may be withdrawn penalty-free in the event of a disaster. The maximum disaster recovery distribution amount is $22,000. Before, the maximum was $100,000.

You have the option of spreading the income from disaster recovery distributions evenly over 3 years, beginning with the year of distribution. This gives you three years to pay the income tax due on the distribution. Alternatively, you can elect to include all the income from the distribution in the year of the distribution. In addition, you have the option of repaying all or part of your distribution within 3 years.

Age 50 Exception for Public Safety Workers

Effective immediately, the SECURE 2.0 Act expands the public safety worker exception to the 10% penalty. Private-sector firefighters, state and local corrections officers, and other forensic security employees may take penalty-free withdrawals from their employer's defined contribution and/or defined benefit plans if they separate from service the year they turn 50 or any year thereafter.

In addition, effectively immediately, the existing 10% penalty exception for public safety workers is expanded to include such workers who separate from service before they reach age 50, so long as they have 25 or more years of service for the employer sponsoring the plan.


Here are 6 takeaways from this article:

  1. Ordinarily, a 10% penalty must be paid if a taxpayer withdraws funds from an IRA or other retirement account before reaching age 59 1/2. But there are exceptions, and the SECURE 2.0 Act creates several new ones.

  2. Starting in 2024, taxpayers may withdraw up to $1,000 from their retirement accounts without penalty in case of a financial emergency, which is broadly defined.

  3. Starting immediately, individuals who are terminally ill may withdraw any amount from their retirement accounts penalty-free. The tax law defines a "terminal illness" as an illness that is likely to result in death within a period of seven years.

  4. Starting in 2024, individuals suffering domestic abuse from a spouse or domestic partner may withdraw up to $10,000 from retirement accounts penalty-free.

  5. Penalty-free withdrawals in the event of a federally declared disaster are made permanent, but the amount is reduced to $22,000.

  6. Penalty-free withdrawals are also allowed to help pay for long-term care insurance and by public safety workers.


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