Can Unemployed Get Access to Retirement Funds Without Penalty?

Generally, if someone with retirement assets takes a cash distribution from their retirement and they have not reached retirement age, or at least age 59 ½, they must pay a tax penalty of 10% to the IRS. This penalty is basically a slap on the wrist for using retirement funds prior to retirement. There are exceptions, such as retirement plans that allow for hardship withdrawals. Will the penalty soon be waived for certain unemployed individuals?

President Obama’s proposed 2016 budget contains a little-known provision that would allow those who are jobless to take penalty-free distributions from their IRAs and employer-sponsored retirement plans. It’s an idea that Obama first proposed in the fall of 2008, but now the initiative has bipartisan support.

Although it’s unlikely to pass exactly as it is currently written, here are the details:

• Individuals who have received unemployment compensation for more than 26 weeks would be able to withdraw up to $50,000 per year from their IRAs and employer-sponsored retirement plans.
• Retirement funds would have be withdrawn either in the year unemployment compensation was received, or the following year.
• To qualify, a person can withdraw their entire balance up to $10,000. If balances in the retirement accounts are more than $10,000, then half of your retirement plan balance up to $50,000 could be withdrawn penalty-free.

There are a couple of downsides to withdrawing retirement funds early. First, while this proposal calls for elimination of the 10% early withdrawal penalty, the distribution is still considered income and subject to regular income taxes on the annual filed 1040. Second, the loss of potential earnings through market gains is a significant consideration any time retirement funds are withdrawn.

While many people worry that this economic plan is targeting those who need retirement savings the most, middle class workers; others see it as a way to help those already in dire financial straits. We will keep you updated on this potential change in the law.

If you would like assistance in setting up a retirement plan or you would like a review of your existing retirement plan, please contact our Employee Benefits Manager, Stacey L. Spencer at 317-260-4421 or sspencer@greenwaltcpas.com.