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New SECURE 2.0 Act 10% Penalty Exceptions

  • Oppenheimer & Co. Inc.
  • March 9, 2023

As you are likely aware, early withdrawals from an IRA, 401(k), 403(b), or other qualified retirement plans, in most cases, are subject to a 10% penalty. That means early withdrawals are taxed and an additional 10% is taken from the withdrawal as a penalty.

Historically, however, there have been numerous ways to avoid the penalty – if for example the funds were used for the purchase of a first home, higher education, or disability costs. While taxes could still apply to these circumstances, the 10% penalty wouldn’t. Now, there are new penalty-free access points to both IRA and company plan retirement accounts made available by the SECURE 2.0 Act update.

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These exceptions are:

  • Public safety employees. The age 50 penalty exception for public safety employees has been expanded to include:
    • Private sector firefighters who separate from service after turning age 50.
    • Public safety employees under age 50 who have at least 25 years of service under the plan.
    • Corrections officers and forensic security personnel employed by state or local governments.

Beginning in 2027, disability distributions to law enforcement officers, firefighters, paramedics, and emergency medical personnel (qualified first responders) may be excluded from gross income after the disabled first responder reaches retirement age.

  • Distributions from 401(k), 403(b) and 457(b) plans to victims of domestic abuse. This type of distribution may be taken beginning in 2024, and may not exceed the lesser of $10,000 (to be indexed) or 50% of the vested account balance and must be made within the one year period beginning on the date the individual is a victim of the domestic abuse. In these cases, plan participants will need to self-certify to being a victim of abuse.
  • Distributions to terminally ill employees. This distribution can be taken for terminal illnesses, which means that a medical condition is expected to result in death in 84 months or less after the date of certification. To be eligible, plan participants must be certified by a physician.
  • Withdrawals made after a federally declared disaster. The 10% penalty for early withdrawals is removed if the withdrawal is made within 180 days of a disaster, provided that the participant’s primary residence is within the declared disaster area and the participant has sustained an economic loss as a result of it.
  • Up to $1,000 per year from a retirement plan to cover personal or family emergency expenses. This change becomes effective in 2024, and the withdrawn funds can be used to cover any unforeseeable or immediate financial needs. If additional money is needed, withdrawals may be taken in subsequent years only if the prior distributions have been re-paid in full, or cumulative employee contributions and deferrals since the emergency withdrawal equal to or exceed the amount of the emergency withdrawal. If neither applies, then the next emergency withdrawal can be made three years after the previous emergency withdrawal.

SECURE Act 2.0 also allows plan sponsors to add emergency savings accounts to their 401(k) and 403(b) plans. Such emergency savings accounts will be linked to the existing employer plans with individual balances. Only non-highly compensated plan participants can contribute to the emergency savings accounts. The maximum amount held by such emergency savings account is $2,500, but plan sponsors may set a lower balance amount. 

These new withdrawal rules can be beneficial, but also confusing – and costly if you don’t qualify for a penalty exemption. Therefore, it is important to review the available exemptions before taking any distribution. If you have questions, contact an Oppenheimer Financial Professional – they’re here to help.


The information provided herein is general in nature for informational purposes only and does not represent legal or tax advice. Oppenheimer & Co. Inc. does not provide legal or tax advice. The material herein has been obtained from various sources believed to be reliable but does not purport to be a complete statement of all material facts relating to the strategy or investments types discussed. Contact your legal or tax advisor for specific advice regarding your circumstances.