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January 17, 2023 at 10:00 AM
What You Need to Know
- Secure 2.0 expands the ability of retirement plan participants to access their savings in case of certain types of emergencies and other unforeseen situations.
- The new law clarifies hardship rules for qualifying births or adoptions and expands them to include victims of domestic violence.
- Advisors should ensure clients are aware of the withdrawal limits and repayment terms for their particular situation.
The Secure 2.0 Act ushered in many different changes that will affect retirement plan participants going forward. Many of those provisions expand the ability of retirement plan participants to access their savings in case of certain types of emergencies and other unforeseen situations that tend to create financial hardship, including disasters and situations involving abuse.
The new law also provides important clarity with respect to existing exceptions to the early withdrawal penalty for retirement accounts. Some of these provisions are effective immediately and others will take effect in the coming years. These changes can be important for taxpayers who are faced with difficult and unforeseen challenges in 2023 and beyond, providing an important source of liquidity for retirement savers.
Withdrawals for Family Circumstances
Beginning in 2024, plan participants will be entitled to take penalty-free withdrawals if they certify that they have been a victim of domestic violence by a spouse or domestic partner within the one-year period prior to the withdrawal. The withdrawal will be limited to the lesser of $10,000 (the amount will be indexed for inflation) or 50% of the participant’s vested account balance. Plan participants who take advantage of this withdrawal provision will be permitted to repay the amounts withdrawn within three years.
Taxpayers who have been certified by a physician as being terminally ill will also be permitted to take penalty-free withdrawals beginning immediately (the withdrawals can also be repaid within three years).
The new law also clarifies that taxpayers who take penalty-free withdrawals for qualifying birth or adoption expenses will not have an unlimited amount of time to repay those amounts. Instead, the repayment must be made within three years of the date of the withdrawal. For qualifying birth or adoption withdrawals that were taken before the new law was enacted, the repayment period ends December 31, 2025.
Additionally, the new law clarifies that plans that allow hardship distributions may rely on the employee’s certification as to the existence of the hardship and the amount needed. Previously, it was only clear that the employer was permitted to rely on the employee’s certification about the lack of cash or other liquid assets needed to address the hardship.
