Secure 2.0 Act - Domestic Violence Withdrawal

[bsperkins]

Hello - I recently learned about the new Secure 2.0 Act which allows you to withdrawal $10,000 or 50% of your vested account balance (whichever is less). My plan sponsor has told me they do not "participate" in this aspect of the new law. However, I rolled over a previous employer's 401(k) to them which they will allow me to withdrawal from that sub-account. If I make a withdrawal from my plan there will it still be exempt even though they have decided not to participate? In other words, could I still make the withdrawal and then just provide the exemption reason on my 2024 taxes to not be charged the penalty? My plan sponsor says they don't care about the reason for my withdrawal and they won't list a reason or ask me to make any certification on their end. I just don't want to be surprised when I file next year and the penalty isn't waived. Can someone please also walk through the mechanics of how an exemption is supposed to normally work in these cases? What role does the plan sponsor need to even play in the process?

[HollyP]

Yes, if you are a victim of domestic violence in 2024 and take the distribution this year, then you may qualify for the exception to the early withdrawal penalty. This doesn't mean that you are exempt from taxation on the actual distribution itself, but just the 10% penalty for an early withdraw. It's important to note that if you repay the withdrawn money from the retirement plan within three years, you will be refunded for income taxes paid on the distribution amount. The IRS hasn't yet issued guidance on how this new domestic violence exception to the early withdraw penalty will be handled on Form 1099-R, and plan sponsors are still figuring out how to accommodate this new law.  

It's likely that it'll be treated like other common early penalty withdrawal exceptions, meaning you will be asked follow-up questions in TurboTax when preparing your tax year 2024 return to indicate that you qualify for an exception to the early distribution penalty and it will be reported on Form 5329. For more discussion on this topic, see the response from dmertz here. 

Additionally, take note of Pub 590 B page 2, the Distributions to victims of domestic abuse section.

[bsperkins]

Thank you, Holly - this is very helpful! I'm coming up on the anniversary of the domestic violence event, so I don't want to miss out on this window given it is only a year from the event. If I'm understanding your response, it shouldn't be a problem from an exemption perspective to make the withdrawal if I am eligible and can but just becomes a matter of getting the payer (plan sponsor) to code correctly on there end (if IRS issues guidance) and entering it appropriately on the tax form, as applicable. Given the exact details are still being ironed out do you think it is still OK to make the withdrawal at this point if my plan is allowing for a general purpose early withdrawal?

[Vanessa A]

Yes, you can.  Since the law is currently in place, as long as you meet the criteria, then you should be exempt from the 10% penalty.  However, be sure that your plan sponsor is aware of the reason and it may take you a few attempts to get the correct 1099-R (IF they add a code for it). But, document everything to be on the safe side.