Bill Gordon, AIF®

The SECURE act was signed into law on December 20, 2019.  There are some key provisions that may have an impact on your retirement strategy.  Let’s focus on the provision of dealing with plan withdrawals for birth or adoption.

OLD LAW – Generally, distributions from a qualified retirement plan, 403(b) plan, 457(b) plan, or IRA are included as income from the year in which the distribution is taken.  Without a certain exception, if the distribution occurs before age 59 ½ there is a 10% tax penalty.  Birth or adoption is not on the list of exceptions.

NEW LAW – This provision allows for a “qualified birth or adoption distribution” from a retirement plan or IRA.  As long as certain conditions are met, qualified birth or adoption distributions

  1. Can be distributed regardless of whether an in-service distribution is otherwise permitted
  2. Will be exempt from the 10% early distribution tax penalty
  3. Will be exempt from the 20% withholding, 402(f) notice, and direct rollover rules otherwise required when distributed from a retirement plan
  4. Can be repaid to certain retirement plans and IRAs without regard to the usual 60-day limit for rollovers

If the distribution is taken within one year of the birth or adoption, it will be treated as a “qualified birth or adoption distribution” subject to the following conditions

  1. Limited to $5,000 per birth or adoption
  2. Does not include the adoption of a child of a taxpayer’s spouse
  3. Limited to the adoption of children either under age 18 or physically or mentally incapable of self-support.

The $5,000 limit is on an individual basis meaning both parents each may receive a distribution of up to $5,000 per qualifying birth or adoption. 

The individual will need to provide certain information regarding the eligible child on the individual’s tax return.

This change applies to distributions made after December 31, 2019.

WHAT IT MEANS – Having a child is expensive, and they just seem to get more and more expensive as time goes on.  This new provision allows you to bypass the 10% penalty and utilize some of your retirement money to offset costs.  Obviously certain stipulations must be met but having the option to utilize those funds can benefit you when going through your financial plan.  Like most of the SECURE Act provisions, be sure to consult a professional and see how your unique situation can be altered by the new law.

Check out the other key provisions of the SECURE Act

SECURE ACT Key Provisions

SECURE ACT Detailed Summary