Secure 2.0 domestic violence withdrawal

[ED001]

I plan to withdraw $10k from my IRA Share account from my Credit Union to pay for my legal fees and costs in a domestic violence restraining order against an ex under the new SECURE 2.0 Act’s domestic violence provision: “Section 314 of the SECURE 2.0 Act beginning in 2024 allows a participant who is a survivor of domestic violence to receive a penalty free distribution from their retirement account (401(k), 403(b), and 457(b) plans).”

How can I be sure I don’t pay the penalty? My 401k administrator says my employer doesn’t have the option available but rather a hardship loan withdrawal. So I am going to my credit union which has my IRA to take a withdrawal but it doesn’t seem like anyone is familiar with Secure 2.0. 

is this withdrawal that just gets reported on next year’s taxes? Does anyone know how such a withdrawal happens?

[fanfare]

When you are exempt from early withdrawal penalty you can report that on your tax return with the appropriate exception code, which happens to be "16".

Credit Union is not involved.

For the same reason you can use your 401k.

Note: penalty free does not mean tax free.

You may still want to have some withholding.

@ED001 

[dmertz]

As you found, employer plans like your 401(k) are not required to offer in-service distributions for this purpose.  Many plans are in the process of updating their plan agreements to include this optional feature, but until this feature is adopted by the plan such distributions are not available from the plan.  On the other hand, IRAs are not subject to limitations on distributions.

Although the IRS has not yet provided guidance for this provision, this provision is similar to that for a qualified birth or adoption distribution, so one might expect that the IRS will require it to be reported similarly.  If so and the recipient is under age 59½, the payer will use code 1 to report the distribution on Form 1099-R and the recipient will need to claim the penalty exception (yet to be assigned an exception code since this is new for 2024) on line 2 of Form 5329.  Although exempt from penalty, the distribution is still subject to ordinary income taxes.

Regarding possible repayment within 3 years, the IRS has provided guidance on how the IRA custodian is to report the repayment on Form 5498 but I don't think that the IRS has yet provided guidance on how the individual is to report the repayment on their tax return.  It might be that the individual would need to amend the tax return on which the distribution was reported and report the repayment as a rollover.

[dmertz]

@fanfare , code 16?  That code has to do with distributions from annuity contracts to the extent that the distributions are allocable to the investment in the contract before August 14, 1982.

[fanfare]

oops. typo.

my tax software shows code 06 for "domestic relations" on Form 5329, which I assumed covers "domestic violence"

It would seem anyone who wants their penalty removed can just enter code "99".

[dmertz]

Code 06 does not apply to this situation.  Code 06 is for payments made to an alternate payee under a QDRO.  I expect that when the 2024 instructions for Form 5329 are published they will include a new code for a qualified domestic violence distribution.