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San Jose, CA 95128

How Does the SECURE 2.0 Act Affect Taxes Related to Retirement Accounts?

 Posted on March 06, 2023 in Taxation Law

san jose tax lawyer Retirement accounts such as 401Ks and IRAs are a great way to save for the future and help protect your financial security. When you contribute money to these accounts, it grows over time, and in most cases, you will not have to pay taxes until you withdraw the funds. This can provide tremendous benefits, such as tax-free compounding of your investments and significant savings when you retire. However, there may be times when you may need to access money in retirement accounts early due to unforeseen circumstances or emergencies. Early withdrawals can result in significant penalties, and taxes will typically apply. Fortunately, with the recent passage of the SECURE 2.0 Act, some exceptions have been made that allow individuals to make withdrawals from their retirement accounts without incurring excise taxes or penalties in certain circumstances.

New Exceptions to the Excise Tax on Early Retirement Account Withdrawals

Typically, a 10 percent excise tax will apply to distributions from a retirement plan that occur before the account holder reaches the age of 59 1/2. However the SECURE 2.0 Act, which was passed by Congress in December 2022, provides some exceptions to the excise tax, including:

  • Birth and adoption expenses - Distributions may be made from a retirement plan to address qualified expenses related to the birth or adoption of a child. These distributions can be repaid to make up for the amount that was withdrawn. However since tax refunds are generally not available for contributions made after a certain amount of time, the new law has limited the recontribution period to 3 years.

  • People with terminal illnesses - An account holder who has been certified by a medical professional as having a terminal condition that is expected to result in their death within 7 years can receive penalty-free distributions from their retirement plan. If necessary, these distributions may be repaid within 3 years after the date of distribution.

  • Victims of disasters - In situations where a person was affected by a federally declared disaster that took place after January 26, 2021, up to $22,000 can be withdrawn from a retirement plan. Recontributions can be made within 3 years of the date of distribution. In addition, a distribution used to purchase a home prior to the disaster may also be recontributed, including in situations where distributions were received, but a home purchase was abandoned due to a disaster.

  • Corrective distributions following excess contributions - If a person contributes more than the allowed amount to an IRA, a distribution may be required. Under the new law, these corrective distributions are exempt from the 10 percent excise tax. In addition, some adjustments have been made to the statute of limitations for errors related to excess contributions or failure to take required minimum distributions. The statute of limitations will begin when a person files their 1040 tax return form in the year the error was made. For excise tax related to excess contributions, the statute of limitations is 6 years.

  • Emergencies - In situations where an account holder has immediate financial needs related to a personal or family emergency, penalty-free distributions may be made. Up to $1,000 per year may be withdrawn, and these distributions may be repaid within 3 years. This option will become available on January 1, 2024.

  • Domestic violence - Victims of domestic abuse may receive penalty-free distributions from retirement plans to help them escape a dangerous situation or address other needs. Up to $10,000 or half of the balance of an account may be withdrawn, whichever amount is lower. Distributions may be repaid within 3 years. This option will become available on January 1, 2024.

Contact Our San Jose, CA Tax Lawyer

Understanding the taxes, penalties, and exemptions that may apply to distributions from IRAs or other retirement accounts is not always easy. If you need to make early withdrawals, John D. Teter Law Offices can help you understand your options, and we will work with you to make sure you receive the proper exemptions while addressing any other tax-related concerns you may encounter. Contact our San Jose tax law attorney at 408-866-1810 to set up a consultation and learn how we can assist you.


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