Ease Financial Demands
If you can imagine for a moment, my friends John and Jenny, newlyweds of only three months. Jenny and John were trying to be smart by diligently saving for their retirement. They worked on getting their finances to begin what they’d eventually hope to be a family of six. But then, their plan came to a screeching halt. John got laid off from his job, and two weeks later, Jenny found out they were pregnant. The lay-off and the pregnancy felt like double trouble. Fortunately, the SECURE Act allows them to get $5,000 each from their retirement plans without penalty to ease the financial demands of starting a new family. They expect to be the proud parents of a baby born in October of 2020. To help with the expenses, Jenny takes a $5,000 withdrawal from her 401(k) plan. And, John takes $5000 from his IRA. All penalty-free.
And if they are able in the future, they can replace the money they took out. More to come on this.

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Why is this important?

Becoming a new parent can put a severe financial strain on families whether through adoption or pregnancy. As a result of the SECURE Act, each parent is able to take up to $5,000 per person from a company savings plan or IRA. New parents can choose to repay the money into the retirement account, however, this is not a loan but a penalty-free withdrawal.

When Can this be done?

A distribution is qualified if it is made from an IRA or company plan within one year of the date of birth or the date on which the adoption is finalized. There is a $5,000 lifetime (not annual) limit per birth or adoption on penalty-free withdrawals.

How is this done?

Talk to your CPA or call us to ensure you are doing it right. It should be pretty straight forward but you know the old saying “Measure twice, cut once”.

Bonus

The birth or adoption distribution amount can be repaid at any future time (re-contributed back to any retirement account).

The Rule

Section 112. Penalty-free Withdrawals from Retirement Plans for Individuals in case of birth or adoption.

The legislation provides for penalty-free withdrawals from retirement plans for any “qualified birth or adoption distributions.” Normally, there is an additional 10 percent tax penalty on distributions that do not meet certain requirements. This penalty does not apply to distributions for a qualified birth or adoption if that distribution does not exceed $5,000 for each birth or adoption. A qualified birth or adoption distribution is any distribution from a plan to an individual within one year of the date of the birth or date of the legal adoption. An eligible adoptee is defined as an individual (other than the child of the taxpayer’s spouse) who is not yet 18 years old or is physically or mentally incapable of self-support. Also, the individual is allowed to repay any qualified birth or adoption distribution. However, the details will need to be worked out in regulations.

Note:

You will still have to pay income taxes on the money you take from your retirement account. Depending on how that leaves your taxable income amount at the end of the year, you may want to reconsider. Ask your CPA how this strategy would affect the bottom line tax costs all things considered before you decide.

Thank you! Whether you are reading this for yourself, a family member, or friend, thank you for your interest in helping make it easier to adopt a child!

More to Come …

George Wells

Ps. As always, when you have specific questions or need specific application insights, drop us a line. Life is too short to not – Retire Happily!

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The Secure Act, which was signed into law in December 2019, includes a provision that allows individuals to withdraw up to $5,000 from their retirement accounts penalty-free for the birth or adoption of a child. This provision aims to help individuals cover the costs associated with welcoming a new child into their family, such as medical expenses, childcare costs, and other related expenses.

The ability to withdraw funds penalty-free for the birth or adoption of a child is a significant benefit for individuals who may be facing financial challenges during this important life event. The $5,000 withdrawal limit per child means that individuals could potentially access a substantial amount of money from their retirement savings to help cover the costs of expanding their family.

It is important to note that while the funds can be withdrawn penalty-free, they will still be subject to income tax. However, the Secure Act also allows individuals to repay the withdrawn funds back into their retirement accounts within three years without any tax consequences.

Additionally, the provision includes a provision that allows individuals to borrow from their retirement accounts for the birth or adoption of a child. This means that individuals can take out a loan from their retirement accounts and pay it back over time, similar to a traditional loan.

Overall, the ability to withdraw funds penalty-free for the birth or adoption of a child provides much-needed financial support for individuals during this important time in their lives. Whether it is covering medical expenses, childcare costs, or other related expenses, this provision offers individuals the flexibility to access their retirement savings to help support their growing family.

If you are considering using this option, it is essential to consult with a financial advisor or tax professional to understand the potential implications of withdrawing funds from your retirement accounts. With proper planning and guidance, individuals can make informed decisions about how to best utilize this benefit to support their family’s financial needs during the birth or adoption of a child.