There are a few new possibilities, thanks to Secure 2.0
Dear Dan,
In your column “I want to access my 401(k) early. Is a loan the only way?,” you talk about in-service distributions for people over 59 ½, hardships, and rolling out funds that rolled in from other accounts like an IRA. Is that it?
401(k) Curious
Dear 401(k),
No. There are more. The in-service distributions you highlight are just two of the most common ways to offer employees access to 401(k) funds beyond loans and hardship distributions. The post-59 ½ and rollover distributions are common in part because they have been allowed for many years. The Secure Act 2.0 passed at the very end of 2022, now opens a handful of new possibilities.
No employer is required to offer these new options. Distributions will be taxable under the usual rules, but these new provisions all waive the customary 10% penalty if the distributions are made prior to age 59 ½. Employees are free to determine a withholding amount on these new distribution types. (No mandatory 20% withholding.) Further, if these distributions are paid back to the plan within three years, the taxes paid upon distribution can be recouped.
Beginning in 2024, employers can allow one distribution in a given year of up to $1,000 for an emergency. The employee need only self-certify that “…an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses” exists. No further emergency distributions can be made until the distribution has been paid back, the employee subsequently contributes an amount to the plan equal to the emergency distribution or three years have passed since the last emergency distribution.
Employers may now attach an “Emergency Savings Account” to a plan. Here the non-highly compensated employees can contribute after-tax funds and the account can grow to as high as $2,500. Any distributions are treated as a qualified distribution from a Roth regardless of age so even earnings would be tax-free.
“Affected employees” of federally declared disasters may take up to $22,000 from the 401(k) and may elect to pay the taxes on the distribution ratably over a three-year period. Similar availability to plan funds has been allowed for specific disaster declarations in the past but this provision applies for all federally declared disasters.
In the past, if an employee terminated employment due to an illness and tapped their account prior to 59 ½, both taxes and the usual 10% penalty could apply. Now the penalty can be waived if a distributable event occurs, and a physician certifies the employee has an illness or physical condition which can reasonably be expected to result in death in 84 months or less.
A victim of domestic abuse may now take the lesser of 50% of their vested account balance or $10,000 without the 10% penalty. The distribution is available during the one-year period starting when abuse occurs.
Restricting access to funds in retirement plans is supposed to give people the incentive to leave their contributions alone to grow. For some, these restrictions have the effect of discouraging use of these plans, so these new forms of access are designed to encourage more participation. To provide these new options, employers must revise their plans and establish the necessary record-keeping and administrative functions. Whether many employers will do that and whether these new provisions will improve participation if they do remains to be seen.
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Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.
Originally published on MarketWatch. Read the original article here.