New Ways to Avoid Early Withdrawal Penalties From Retirement Accounts

With the introduction of new ways to avoid the 10% early withdrawal penalty on retirement accounts, the IRS recently issued Notice 2024-55, which provides additional guidance on two provisions introduced by SECURE 2.0. Learn more about SECURE 2.0 in our article, “SECURE 2.0: Key provisions and planning considerations.”

These provisions add to the growing list of exceptions to the early withdrawal penalty from a retirement plan or IRA. They include penalty-free distributions for personal emergency expenses and distributions for those who are victims of domestic abuse, both available beginning this year.

While the 10% penalty can be avoided in many circumstances, distributions from traditional retirement accounts will still generally be taxable.

More detail on the new exceptions follows.

Emergency personal expense distributions

Limited to one distribution annually from a defined contribution retirement plan or IRA, which cannot exceed $1,000.
There is an option to repay the distribution via a tax-free rollover within three calendar years.
Once a distribution is made, an individual cannot request another emergency distribution during the following three calendar years unless the previous distribution has been repaid or, the aggregate amount of contributions into the plan (employee and employer) after the previous emergency distribution is at least equal to the previous emergency distribution.
Retirement plan providers and IRA custodians are not required to offer personal emergency distributions.
The new IRS guidance includes examples of emergencies, but it is not an exclusive list, and the account owner is allowed to self-certify to their plan provider or IRA custodian that they are dealing with an emergency situation. In a recent Notice, the IRS lists factors to consider, including (but not limited to) medical care, accident or loss of property, foreclosure from a residence, funeral costs, auto repairs and “any other necessary emergency personal expenses.”
While certain plan participants may be eligible for a hardship distribution under the terms of the plan, taking an emergency distribution may be a better option since hardship distributions are generally subject to the 10% early withdrawal penalty.

Domestic abuse victim distributions

As of 2024, a maximum of $10,000 may be withdrawn (or 50% of the vested account balance if resulting in a lower amount) during the one-year period from when an individual becomes a victim of domestic abuse by a spouse or domestic partner.
For future years, the $10,000 limit will be adjusted for inflation.
Similar to emergency distributions, there is a three-year period where the individual can repay the distribution into the account and recoup income taxes paid.
Similar to emergency distributions, retirement plan sponsors are not required to offer this provision within the plan.
Per the IRS, “domestic abuse” means physical, psychological, sexual, emotional or economic abuse.

Tracking the ways to avoid penalties

With these new provisions from SECURE 2.0, there are more than a dozen exceptions to the 10% early withdrawal penalty from retirement accounts. But not all exceptions apply to both 401(k) plans and IRAs.

Here’s a look at the exceptions to the 10% early withdrawal penalty and differences between IRAs and 401(k)s.

Consider taxes

Overall, if funds are needed for an immediate expense, it’s generally better to exhaust other options before considering an early withdrawal from a retirement account. Even if there is an exception to the 10% penalty, taxable income will be generated when taking a distribution from a traditional retirement account. With less retirement funds available later in life, longevity and inflation risk may be more of a challenge.

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