SECURE Act 401k Withdrawal Rules and Provisions

The SECURE Act of 2019 and its successor, the SECURE 2.0 Act of 2022, updated federal retirement savings regulations. A primary goal of this legislation was to provide 401(k) plan participants with more flexibility, allowing them to access retirement funds for specific life events without incurring the typical early withdrawal penalties.

These legislative changes acknowledge that individuals may face financial challenges that require tapping into their long-term savings. By creating new penalty-free withdrawal options, the acts provide a financial safety net for workers dealing with emergencies or major life milestones.

New Penalty-Free Withdrawal Provisions

Qualified Birth or Adoption Distributions

The SECURE Act introduced a provision allowing parents to take a penalty-free withdrawal from their 401(k) following the birth or legal adoption of a child. This provision is designed to help new parents manage the costs associated with welcoming a child into their family. Each parent can withdraw up to $5,000 from their individual retirement account for each event, meaning a couple could withdraw a combined $10,000. The distribution must be taken within one year of the birth or the date the adoption is finalized.

Emergency Personal Expense Distributions

Effective in 2024, SECURE 2.0 permits a penalty-free withdrawal for unforeseeable or immediate financial needs related to personal or family emergency expenses. This distribution is intended for small, unexpected costs. An individual can withdraw up to $1,000 once per calendar year from their 401(k).

To access these funds, the plan participant can self-certify that they are facing such an emergency. If the participant repays the withdrawal within three years, they are permitted to take another emergency distribution; otherwise, they must wait three years.

Withdrawals for Victims of Domestic Abuse

Recognizing the financial difficulties that can accompany domestic violence, SECURE 2.0 created a new withdrawal option for victims. Starting in 2024, an individual who has been a victim of domestic abuse by a spouse or domestic partner can withdraw the lesser of $10,000 or 50% of their vested account balance. This amount is indexed for inflation. The withdrawal must be made within one year of the abuse, and the participant can self-certify that they meet the conditions.

Distributions for Terminal Illness

A provision effective December 29, 2022, allows individuals who are terminally ill to access their retirement funds without penalty. This allows individuals facing a terminal diagnosis to use their own funds for care or other end-of-life expenses. A physician must certify that the individual has an illness or physical condition expected to result in death in 84 months or less. This withdrawal does not have a specific dollar limit beyond the participant’s vested account balance.

Federally Declared Disaster Relief

The SECURE 2.0 Act standardized and expanded rules for distributions related to federally declared disasters. Individuals living in a qualified disaster area who have sustained an economic loss can take a distribution of up to $22,000 from their 401(k). The distribution must be taken within 180 days of the disaster declaration. A significant benefit is the favorable tax treatment; the income from the withdrawal can be spread evenly over three years to manage the tax liability.

Changes to Required Minimum Distributions

The SECURE Acts significantly altered the timeline for when retirees must begin taking Required Minimum Distributions (RMDs) from their 401(k)s. Before the first SECURE Act, individuals were required to start RMDs in the year they turned age 70 ½. The SECURE Act of 2019 pushed the RMD starting age to 72. This change applied to individuals who turned 70 ½ on or after January 1, 2020.

SECURE 2.0 further extended this timeline. Effective January 1, 2023, the RMD age increased to 73. The law also includes a future increase, with the RMD age rising to 75 on January 1, 2033. The penalty for failing to take a required distribution was also reduced from 50% of the shortfall to 25%, and down to 10% if the mistake is corrected in a timely manner.

Repayment Rules and Tax Implications

It is important to understand that a “penalty-free” withdrawal is not a “tax-free” one. Any amount taken from a traditional 401(k) under these rules is included in the participant’s gross income for the year of the distribution and is subject to ordinary income tax rates.

Several of the new distribution types come with a repayment option. For qualified birth or adoption, domestic abuse, terminal illness, and certain disaster relief distributions, the law allows the individual to repay the funds. This repayment can be made to any eligible retirement plan.

The standard window for these repayments is three years, beginning the day after the distribution was received. If a participant repays the funds within this period, they can file an amended tax return for the year of the withdrawal to claim a refund for the income taxes they paid.

Requesting a SECURE Act Withdrawal

To request a withdrawal under a SECURE Act provision, the first step is to contact your 401(k) plan administrator. The administrator manages the plan and can provide the specific forms and procedures for your request. They will inform you of the plan’s rules, as some of these new withdrawal types are optional for employers to adopt.

For certain withdrawals, the process is simplified through self-certification. For emergency personal expense distributions and withdrawals for victims of domestic abuse, the plan administrator can rely on your written statement confirming you meet the necessary conditions.

For other distribution types, some documentation may be necessary. For a qualified birth or adoption distribution, you might need to provide a birth certificate or adoption records. For a withdrawal due to terminal illness, a physician’s certification is required. After submitting the required forms, the plan administrator will process the request.