The Internal Revenue Service (IRS) has issued Notice 2024-55, providing new guidance on exceptions to the 10% additional tax for early retirement plan distributions. This guidance, effective from January 1, 2024, stems from the SECURE 2.0 Act of 2022 and covers distributions for emergency personal expenses and for survivors of domestic abuse.
Emergency Personal Expense Distributions
The new IRS notice allows taxpayers to take distributions from eligible retirement plans to cover unforeseeable or immediate financial needs related to personal or family emergencies. Key points include:
Definition: The notice defines what constitutes emergency personal expense distributions and the criteria for unforeseeable or immediate financial needs.
Eligible Plans: Qualified defined contribution plans, such as 401(k) plans, section 403(a) annuity plans, section 403(b) plans, governmental section 457(b) plans, and IRAs, are eligible for these distributions.
Limitations: There are specified dollar amount and frequency limitations on receiving these distributions.
Repayment Option: Individuals can repay emergency personal expense distributions to certain plans.
Distributions to Victims of Domestic Abuse
Taxpayers who are victims of domestic abuse can receive distributions from eligible retirement plans within one year of the abuse. Key points include:
Definition: The notice defines what constitutes domestic abuse and the criteria for qualifying distributions.
Eligible Plans: IRAs and certain retirement plans not subject to spousal consent requirements under sections 401(a)(11) and 417 can permit these distributions.
Limitations: There is a dollar limitation on these distributions, which is indexed for inflation.
Repayment Option: Individuals can repay these distributions to certain plans.
The notice provides guidance on the requirements for retirement plans regarding these distributions, stating that it is optional for plans to permit them. Additionally, the Department of the Treasury and the IRS plan to issue regulations concerning the 10% additional tax and its exceptions and are seeking comments on the notice, particularly about repayments of certain distributions permitted under section 72(t)(2).
Taxpayers should be aware that while these distributions are includible in gross income, they are exempt from the 10% additional tax. Individuals must report early distributions not subject to the 10% additional tax on line 2 of Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. In 2021, approximately 608,000 individuals reported early distributions exempt from the 10% additional tax.
Image: IRS.gov
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