New 401k Distribution Option Available
By John Friar, CFP, AIF
Partner & Financial Consultant, Park Capital Management – an affiliate of Hausmann Johnson Insurance
The SECURE Act has now been in effect for over a year, however, there are many provisions that organizations should be reviewing to see if new updates should be made for their retirement plan. With the current competitive employment environment, employers are continually looking for ways to improve their employee benefit offerings.
To quickly recap, the SECURE Act contains several provisions aimed at expanding Americans’ access to retirement accounts. One of these was the creation of a new provision allowing for a penalty free distribution from your retirement account for qualified birth or adoption expenses. Participants could now have the ability to withdraw up to $5,000 per parent for the birth or adoption of a child without a 10% early distribution penalty.
At one of the most important and potentially financial stressful points in many individuals lives, having access to their own money to help cover the cost of a major life event like childbirth or adoption can add real peace of mind covering these short-term expenses. Traditionally, the only way participants can take a distribution form their retirement account is through a hardship, loan, attaining age 59 ½, and separation of employment. Childbirth or adoption typically is not allowed under most plans’ hardship distribution options. This provision changes the game.
How does the provision work? After the birth/adoption of a child, a parent is allowed to distribute up to $5,000 per child for qualified expenses. The distribution cannot happen prior to the event but must happen within 12 months following the date of the birth/adoption to avoid the 10% penalty. Some additional good news, the $5,000 limit is available to each parent, meaning if both parents have qualifying accounts, they can each distribute up to $5,000 from their retirement accounts. A key point to remember, this provision allows for participants to avoid only the 10% early distribution penalty, other taxes and penalties may still apply.
With any new provision, it is important to do your homework and investigate whether this may be appropriate for your plan.
The information addressed on this page is for information purposes only and should not be construed as specific tax or retirement plan advice. Individuals should consult a tax advisor or attorney for questions regarding specific tax or legal needs.
Reprinted with permission by Park Capital Management, LLC (“PCM”), an SEC Registered Investment Advisor. The investment products and services offered by PCM are independent of the products and services offered by The Park Bank and are not FDIC insured, may lose value, are not bank guaranteed and are not insured by any federal or state government agency. Park Capital Management, LLC (“PCM”) is affiliated with The Park Bank.