What the New Emergency Retirement-Distribution Draft Guidance Means for Annuities

The Internal Revenue Service recently began a regulatory project that could turn some annuity owners' retirement accounts into rainy day funds. IRS officials posted draft guidelines for implementing sections 115 and 314 of the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act, or Secure 2.0, which added two important exceptions to Internal Revenue Code section 72(t). Comments on the draft are due Oct. 7. For a look at how that draft guidelines could affect annuity owners and annuity advisors, if the guidelines take effect as written and work as the IRS expects, see the gallery above. Internal Revenue Code Section 72(t): IRC Section 72(t) is a law that helps keep the yolk in a client's retirement savings nest egg. Section 72(t) applies to individual retirement accounts, 401(k) plan accounts and other accounts that benefit from federal retirement savings tax incentives. The section normally imposes a 10% additional tax, on top of any income taxes, when a client cracks the nest egg and takes cash out before reaching age 59½. Before 2022, Section 72(t) already included exceptions for retirement savers who became disabled or retired early. The new IRC section 72(t) 10% tax penalty exemptions: Secure 2.0 was part of an appropriations package that moved through Congress in 2022 as part of the Consolidated Appropriations Act, 2023. Section 314 created a relatively narrow exemption for people who need cash as a result of suffering from domestic abuse. For purposes of the distribution exemption, "domestic abuse" means "physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim's ability to reason independently, including by means of abuse of the victim's child or another family member living in the household," according to the draft guidance. Section 115 created a relatively broad "emergency expense distribution" exemption. The new exemption could let a client tap a retirement arrangement for "purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses." The Secure 2.0 provisions establish complicated rules for when savers could take distributions and how often. For emergency person expenses, for example, a saver would have to leave at least $1,000 in the account. The upper limit would depend on the amount of vested assets and could not exceed $1,000. For domestic abuse victims, the distribution could be 50% of the present value of the vested accrued benefits, up to $10,000. Guidance vs. regulations: The IRS said it intends to develop regulations to implement the new early distribution penalty exemptions. But it could focus on finalizing and using the guidance, because the recent Loper Bright Enterprises v. Raimondo U.S. Supreme Court decisions raised questions about what a federal agency has to do to make a regulation stick and how an agency should go about implementing what seem to be ambiguous laws. Legal experts have suggested that federal agencies may rely more on informal batches of guidance and less on formal regulations while waiting to see how the Loper Bright ruling works. Credit: Adobe Stock