7 IRS Retirement Cash Access Draft Facts, for Annuity Advisors

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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.

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.”

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

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