Is the birth of a child exception for early withdrawal of IRA/401k plan still in effect and if so how would that work withdrawing in 2022 being unemployed? Waiver of 10%?

Forum|Forum|4 years ago
January 4, 2022
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Also, I have a 401k as well as a rollover IRA. My 401k has less than $2000. I believe that it has to be a total of only $5000 only for the birth of child exception early withdrawal to count. Can I withdraw what I have from 401k and then remainder of what I can withdraw from my IRA or should I just withdraw the full $5000 from my IRA only?

TurboTax Online

Opus 17

[Edited to add: this answer is out of date because a new exception was indeed passed recently, see the other answer below.]

There is no childbirth exception to early withdrawal of funds from an IRA. The only penalty exception that applies to unemployed persons is an exception for paying health care premiums but only after your health care premiums have exceeded 7.5% of your gross income. If you did qualify for the exception to withdrawing funds to pay health insurance premiums while unemployed, this only applies to the IRA and not the 401(k). You could roll over the 401(k) into an IRA and then withdraw the money from the IRA, but if you withdrew it directly from the 401(k) the penalty exception would not apply because the rules for penalty exceptions for 401(k)s are different and the rules for IRAs.

chrisdg30Author

Thanks. I will most likely take your advice on rolling over the 401k to an IRA. However, according to the 5329 form's instructions it says its a new exception that used with code 12 "other" and that you just have to send a statement with baby's name, age, and TIN number. But I believe this exception was with that CARES act that was good till the end of December 2021. So that's my other question. Will the CARES act be extended(which there is talk that it will be) or does this have nothing really to do with the CARES act and I can just use this form to denote the withdrawal that I plan to make this year? This below link is to the instructions on 5329 form.

https://www.irs.gov/pub/irs-pdf/i5329.pdf

5329 form.png

Opus 17

OK, I learned something new today. The important point was the inclusion of the instructions that referenced IRS notice 2020-68. See section D and the questions that follow especially question D-4.

https://www.irs.gov/pub/irs-drop/n-20-68.pdf

There is a new exception to the 10% penalty on early withdrawal for the birth or adoption of a child. This was created in the SECURE act, not the CARES act, and is permanent. The distribution must be taken within one year of the birth or the adoption of the child. What is important for purposes of your question is that a 401(k) is still not eligible for this exception. Other retirement plans are eligible and an IRA is eligible but not a 401(k), I couldn’t tell you why the law was written that way.

The total amount eligible for the penalty exception is $5000, although you will still pay regular income tax on the distribution. Because the 401(k) is not eligible, if you want to use the 401(k) money, you would first need to do a rollover to an IRA.

However, also note that in most cases you can’t withdraw from a 401(k) if you are still employed at the company that sponsors the plan. A 401(k) plan may allow hardship withdrawal‘s, but that is up to the individual company, and the rules to qualify for a hardship withdrawal may vary. If you are no longer employed with the plan sponsor, then it will be no problem to do a roll over to an IRA and then withdraw the money. If you are still employed, you will have to talk with their benefits office about whether or not you can do a rollover treated as a hardship withdrawal.