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Raiding a retirement account can be expensive. Withdrawing money before age 59 1/2 is usually subject to income tax, a 10% federal penalty, and at worst a loss of future tax deferred compounded earnings. If a 30-year-old man withdrew his $1,000 from a personal retirement account or his 401(k), he could lose over $11,000 in future retirement, assuming an average annual rate of return of 7%. there is.

Previously, there were several ways to avoid penalties. Congress recently added a few more exceptions, some of which allow repayment within three years. That way, you can get a refund of the taxes you paid, and best of all, you can defer taxes and start growing your money again for the future.

“It’s still better to have retirement money set aside for retirement,” says Erin Itko, director of financial planning at Tarbox Family Office, a Scottsdale, Arizona, wealth management firm. But even if she can’t do that, she says, at least she can limit the damage of withdrawing money early.

What you need to know about Secure 2.0

The new penalty exception is part of Secure 2.0, a package of retirement plan changes Congress passed late last year. Some exemptions are available for IRAs now, while others will come into force in the next few years, according to AARP legislative adviser David Sartner. This exception may also apply to workplace plans such as 401(k) and 403(b), but employers may need to opt-in, so check with Human Resources, he said. Sartner says.

However, repayment options are not yet available for most penalty exceptions. For example, if he withdraws $10,000 from the IRA to buy his first home or pay for higher education, he can avoid the penalty, but he can’t pay the money back later for a tax refund. .

Disasters, terminal illness, family expansion

A new penalty exception that allows reimbursement is for disasters. People who live in federally declared disaster areas and suffer economic losses can withdraw up to $22,000 without penalty. Income tax must also be paid upon withdrawal, but he can spread the income over three years to reduce potential tax impact. This exemption was retroactive to January 26, 2021.

Another potential large exemption with a repayment option is for terminal illness. Starting this year, the 10% fine will be waived for those who are certified by a doctor to die within seven years, according to Itoko, a CPA who also serves on the American Institute of Certified Public Accountants’ Individual Financial Planning Executive Committee. . There is no limit on the amount you can withdraw.

The three-year repayment period now also applies to penalty waivers for having or adopting children. This exception allows each parent to withdraw her $5,000 within 12 months of the child’s birth or adoption.

Exceptions to Domestic Abuse and Upcoming Economic Emergencies

Next year, the 10% fine for victims of domestic violence will be waived. Penalty-free withdrawals are limited to $10,000 or 50% of your account value, whichever is less, and can be repaid over 3 years.

Starting next year, up to $1,000 will be distributed without penalty as part of emergency spending. Once the money is repaid, people can make such withdrawals once a year. Otherwise, the distribution he is allowed only once every three years.

Note that both of these exceptions are “self-certified”. That means submitting a written statement claiming that you meet the requirements without submitting any other documents or evidence, Itkoe says.

Other Secure 2.0 Penalty Exceptions

An exception to penalties for long-term care insurance payments will begin in 2026, but it will only apply to workplace plans, not IRAs. Please note that withdrawals are limited to $2,500 or 10% of your account balance, whichever is less, but this withdrawal can only be used to pay insurance premiums, not actual medical expenses. I want one, says Sartner.

Secure 2.0 also expands the exception for “Public Security Officers” to early withdrawal from workplace plans.

Previously, the 10% fine was not applied to withdrawal from a workplace plan if the worker left the job in the year they turned 55 or 50 for public security officials. Currently, private firefighters and state and local prison officers can also qualify for public safety exceptions after they turn 50. In addition, public security officials who have been with the employer that sponsors the scheme for at least 25 years can now avoid fines regardless of the following reasons: their age.

This is just a summary of the new penalties exceptions. The rules are so complicated that you should consult a tax expert before pulling out, Itokoe said. Pros can also assist in filing amended tax returns if withdrawals are repaid.

But no one should think exceptions make canceling retirement plans a good idea, she says, because most people won’t pay them back even if they had the option to do so.

“Withdrawing from your retirement account should always be a last resort,” she says.

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This column was provided to The Associated Press by personal finance site NerdWallet. The content is intended for educational and informational purposes and does not constitute investment advice. Liz Weston is a NerdWallet columnist, certified financial her planner, and author of Your Credit Score. Email: Twitter: @lizweston.

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