Expanded Exceptions to 10% on Early Retirement Plan Withdrawals

Remember these withdrawals would still be subject to ordinary income tax – we are solely avoiding the 10% penalty on early withdrawals (before 59 ½) with these exceptions.  Beginning in 2023, individuals with a terminal illness will be able to withdraw funds from their retirement plans or IRAs without penalty and there is no limit to this exception.  In 2024, victims of domestic abuse would be able to withdraw up to $10,000 from their retirement plan or IRAs penalty free.  Starting in 2026, individuals subject to long term care would be able to withdraw up to $2,500 penalty free from their retirement plan but not IRAs. 

Do you have unused funds in your child’s 529 account?

Beginning in 2024, unused 529 accounts can be rolled over to a ROTH IRA in the beneficiary’s name.  The account must be open for at least 15 years and have no new contributions in the last five years.  These rollovers will be limited to the annual ROTH IRA contribution limits, currently $6,500.  There is also a lifetime limit of $35,000.  These rollovers will be tax and penalty free.

Required Minimum Distributions (RMD) on Inherited IRAs

If you inherited an IRA from someone who passed after 12/31/2020, there has been a lot of confusion on how to officially handle these accounts.  All agree that the account must be completely emptied by the end of the 10th year following the year of the original account owner’s death.  However, are you supposed to be taking RMDs from this inherited IRA?  Initially, the answer was no.  Then, the IRS said yes but they would not require them before 2023.  Now, we are still waiting on final regulations from the IRS but the IRS has delayed RMDs to 2024 at the earliest.  What does this mean?  If you have an inherited IRA from someone who passed after 12/31/2020, you are not required to take a RMD until 2024 at the earliest.  You can take distributions but you are not required to do so.