Can I Make an IRA Withdrawal for the Birth of a Child?
The arrival of a new child creates an exception for IRA withdrawals, avoiding the 10% penalty and offering a unique path to repay the funds later.
A provision within the Setting Every Community Up for Retirement Enhancement (SECURE) Act created a specific option for new parents. This legislation allows for a “qualified birth or adoption distribution” from an Individual Retirement Arrangement (IRA), providing a way to access retirement funds without the usual early withdrawal penalties. This distribution is designed to offer financial flexibility during a significant life event.
Understanding the Withdrawal Rules
An individual can withdraw up to $5,000 from their IRA for each qualified birth or adoption. This limit is per parent, meaning if both parents have their own IRAs, they can each take a $5,000 distribution for the same child, for a total of $10,000. The withdrawal is not a one-time lifetime event; it is available for each new child.
A qualified event is the birth of a child or the legal adoption of an individual who is under the age of 18. An adoption also qualifies if the individual is physically or mentally incapable of self-support, regardless of age. The distribution must occur within the one-year period following the child’s birth or when the adoption is legally finalized.
This provision applies to various types of retirement accounts. You can take a qualified birth or adoption distribution from Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. The rule also extends to employer-sponsored plans like 401(k)s. There is no requirement to demonstrate financial need or to track how the funds are used.
Tax Treatment and Reporting
While the distribution is exempt from the 10% early withdrawal penalty typically applied to funds taken before age 59 ½, it is not free from income tax. The amount you withdraw is included in your gross income for the tax year you take the distribution and is subject to your ordinary income tax rate.
The tax impact varies depending on the type of IRA. For a Traditional IRA, where contributions are often made with pre-tax dollars, the entire distribution amount is generally considered taxable income. With a Roth IRA, the situation is different because contributions are made with after-tax money. Withdrawals from a Roth IRA are first sourced from your direct contributions, which can be taken out tax-free and penalty-free at any time. The penalty waiver would apply only if your withdrawal exceeds your contribution amount and dips into earnings before the account has been open for five years.
Proper tax reporting is necessary to claim the penalty exception. Your IRA custodian will issue a Form 1099-R to you and the IRS, showing the total amount of your distribution. You must report this distribution on your Form 1040. To claim the waiver for the 10% penalty, you will likely need to file Form 5329 and use the specific exception code designated for birth or adoption distributions.
Repaying the Distribution
The law permits you to recontribute the amount you withdrew back into an eligible retirement account, such as an IRA. This repayment is not subject to the annual IRA contribution limits, as it is treated as a rollover contribution. This allows you to restore your retirement savings without impacting your ability to make regular annual contributions.
If you choose to repay the funds, you can file an amended tax return, Form 1040-X, for the year you initially took the withdrawal. By filing an amended return, you can claim a refund for the income taxes that were assessed on the distribution amount.
The law provides a three-year window to repay the distribution. For distributions taken on or before December 29, 2022, the repayment must be completed by December 31, 2025. For distributions taken after that date, the repayment period ends three years after the day you received the funds. This gives you a defined period to recover financially before deciding to replenish your retirement account.