IRS Guidance on Exceptions to 10% Additional Tax for Early Retirement Plan Distributions

WASHINGTON – The Internal Revenue Service (IRS) issued Notice 2024-55 PDF, which provides guidance on exceptions to the additional tax when taking early permissible retirement plan distributions for emergency personal expenses and for victims of domestic abuse. This was added by the SECURE 2.0 Act of 2022, and the provisions became effective on January 1, 2024.

Emergency Personal Expense Distributions

The IRS notice allows taxpayers to receive distributions from eligible retirement plans to meet unforeseeable or immediate financial needs related to necessary personal or family emergency expenses. Here are the key points from the notice:

1. Definition: Emergency personal expense distributions cover unforeseeable or immediate financial needs.

2. Eligibility: Qualified defined contribution plans (such as section 401(k) plans), section 403(a) annuity plans, section 403(b) plans, governmental section 457(b) plans, and IRAs can permit these distributions.

3. Limitations: There are specific dollar amount and frequency limitations on receiving these distributions.

4. Repayment: Individuals who receive emergency personal expense distributions are allowed to repay these distributions to certain plans.

Distributions to Victims of Domestic Abuse

The notice also addresses distributions for victims of domestic abuse, providing relief for individuals facing such challenging circumstances. Key highlights include:

1. Definition: Distributions are available to taxpayers who are victims of domestic abuse by a spouse or domestic partner within a one-year period from the date of the abuse.

2. Eligibility: IRAs and certain retirement plans that do not require spousal consent under sections 401(a)(11) and 417 can permit these distributions.

3. Limitations: There are dollar limitations on these distributions, which are indexed for inflation.

4. Repayment: Individuals who receive domestic abuse victim distributions are permitted to repay these distributions to certain plans.

Guidance for Retirement Plans

The notice provides additional guidance for eligible retirement plans, emphasizing that it is optional for plans to permit these types of distributions. Moreover, the Department of the Treasury and the IRS are expected to issue further regulations on the 10% additional tax, including exceptions to this tax, and are requesting comments on the notice, specifically regarding the repayment of certain distributions permitted under section 72(t)(2).

Reporting Early Distributions

It's important for taxpayers to understand that these distributions, while includible in gross income, are not subject to 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.

For context, in tax year 2021, about 608,000 individuals reported early distributions from qualified plans (including IRAs) that were not subject to the 10% additional tax.

For more detailed information, please refer to the original IRS notice and stay tuned for further updates from the IRS and the Department of the Treasury.

Content adapted from the IRS website: Retirement Plan Distributions: IRS Provides Guidance on Certain Exceptions from 10 Percent Additional Tax for Emergency Personal or Family Expenses and for Survivors of Domestic Abuse