Key Takeaways
- SECURE Act allows employees to withdraw up to $5,000 for birth or adoption of a child
- Employees can recontribute all or portion of the distribution
- For plan sponsors, allowing qualified birth or adoption feature in a plan is optional
Under the SECURE Act, more flexibility has been granted to plan participants who want to draw on retirement savings to help offset the cost of childbirth or adoption. We are seeing a lot of interest in this new feature, and we believe that is so because it is yet another way for an individual to access money when needed the most (hey, life happens!).
Allowable distribution and timing
Starting 2020, each parent can take up to $5,000 for qualified birth or adoption, meaning a couple can take up to $10,000. What if the couple, say, have twins? Well, they’re in luck and can withdraw up to $20,000. The withdrawal must be made within one (1) year following birth or adoption.
Tax consequences
Generally, distributions from retirement plans are subject to 10% early withdrawal penalty when employees are under age 59-1/2. Qualified birth or adoption distributions are not subject to this penalty, however. The withdrawal is also not subject to mandatory withholding at the time of distribution as it normally applies to other distributions. The distribution is included in gross income.
Recontributions
Employees who take distributions for qualified birth or adoption can repay the amount in full or in part. The recontribution can be made to any qualified retirement plan or IRA. And there is no time limit as to when the distribution can be recontributed.
Plan design considerations
This feature is fully optional, meaning plan sponsors are not required to offer it in their plans. However, we believe that the provision will gain popularity in the long run. Plans that wish to allow qualified birth or adoption distribution will need to memorialize it by amending their plans.
Final words
We at NESA believe qualified birth or adoption disbursement under a retirement plan is a great feature afforded by the SECURE Act. Why? Because, hey, life happens. If your plan already allows for qualified birth or adoption feature, wonderful! But if not, you will want to discuss the pros and cons with your trusted retirement plan service provider before doing so, as there are many moving parts.
Click here to learn more about including long-term, part-time employees in retirement plans under the SECURE Act.
This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company’s benefits representative for rules specific to your plan.
About the Author
A 15-year veteran in all aspects of workplace retirement plan benefits program, Mizan J. Rahman is on a mission to help hard-working Americans enjoy a meaningful financial future. He specializes in the compliance, administration, design, and legal documentation of 401(k), 403(b), and 457(b) plans. Mizan provides high-level, personalized consulting to small businesses and not-for-profit organizations. One of the select few to have been awarded Enrolled Retirement Plan Agent (“ERPA”) by the Internal Revenue Service, Mizan regularly represents clients in front of DOL and IRS during audits.
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