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

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

by Platinum Professional Services -
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The IRS has released Notice 2024-55, offering guidance on exceptions to the 10% additional tax for early retirement plan distributions made for emergency personal expenses and for victims of domestic abuse. These provisions, part of the SECURE 2.0 Act of 2022, became effective on January 1, 2024. The notice allows taxpayers to access funds from eligible retirement plans to cover unforeseeable or immediate financial needs related to necessary personal or family emergencies.

The guidance defines what qualifies as an emergency personal expense and specifies the types of retirement plans eligible for such distributions, including 401(k) plans, 403(a) and 403(b) plans, governmental 457(b) plans, and IRAs. It also outlines the limitations on the dollar amount and frequency of these distributions and permits individuals to repay these distributions to certain plans. For victims of domestic abuse, the notice allows distributions within a year of the abuse, providing definitions and specifying eligible retirement plans, along with repayment options.

The IRS also provides instructions for retirement plans on accommodating these distributions, noting that implementation is optional for the plans. The Department of the Treasury and the IRS plan to issue further regulations on the 10% additional tax and its exceptions, requesting public comments, particularly on repayments under section 72(t)(2). Taxpayers should report such distributions, which are includible in gross income but exempt from the 10% additional tax, on Form 5329. In the 2021 tax year, about 608,000 individuals reported early distributions not subject to this additional tax.