Federal

Expanding Penalty Free Withdrawal Act

Source: Congress.gov · 600 words in original text

What This Bill Does

This bill allows unemployed people to withdraw money from their retirement plans without paying an early withdrawal penalty (a tax penalty for taking money out before retirement age). The bill expands who can make these penalty-free withdrawals based on how long they have received unemployment benefits.

Who It Affects

Individuals who have separated from employment and received unemployment compensation benefits.

Key Provisions

• Unemployed individuals can withdraw money from retirement plans without penalties if they have received unemployment benefits for 26 consecutive weeks under federal or state unemployment law, or for the maximum period allowed under their state's law, whichever is shorter. (Sec. 2(a)) • Withdrawals must occur during the year unemployment compensation is paid or in the following year. (Sec. 2(a)) • The withdrawal amount cannot exceed $50,000, reduced by any other similar withdrawals made from all the individual's retirement plans in the prior 12 months. (Sec. 2(a)) • The withdrawal amount also cannot exceed whichever is larger: $10,000 or half of the total value of the individual's retirement plans at the time of withdrawal. (Sec. 2(a))

What Changes

The Internal Revenue Code will be amended to create a new exception allowing penalty-free withdrawals from retirement plans for long-term unemployed individuals who meet the specified requirements.

Important Definitions

The bill does not explicitly define key terms like "retirement plans" or "unemployment compensation."

Effective Date

Distributions made after December 31, 2022.

I 118TH CONGRESS 1ST SESSION H. R. 585 To amend the Internal Revenue Code of 1986 to expand the availability of penalty-free distributions to unemployed individuals from retirement plans. IN THE HOUSE OF REPRESENTATIVES JANUARY 26, 2023 Mrs. WATSON COLEMAN (for herself and Ms. NORTON) introduced the following bill; which was referred to the Committee on Ways and Means A BILL To amend the Internal Revenue Code of 1986 to expand the availability of penalty-free distributions to unem- ployed individuals from retirement plans. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Expanding Penalty 4 Free Withdrawal Act’’. 5 VerDate Sep 11 2014 00:34 Feb 10, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H585.IH H585 pbinns on DSKJLVW7X2PROD with $$_JOB 2 •HR 585 IH SEC. 2. EXPANSION OF EXCEPTION FOR PENALTY ON 1 EARLY DISTRIBUTIONS TO UNEMPLOYED IN- 2 DIVIDUALS FROM RETIREMENT PLANS. 3 (a) IN GENERAL.—Section 72(t)(2) of the Internal 4 Revenue Code of 1986 is amended by adding at the end 5 the following new subparagraph: 6 ‘‘(I) LONG-TERM UNEMPLOYMENT DIS- 7 TRIBUTIONS.— 8 ‘‘(i) IN GENERAL.—Distributions to 9 an individual after separation from em- 10 ployment— 11 ‘‘(I) if such individual has re- 12 ceived unemployment compensation 13 for 26 consecutive weeks under any 14 Federal or State unemployment com- 15 pensation law by reason of such sepa- 16 ration (or, if less, for the maximum 17 period for which unemployment com- 18 pensation is available under State law 19 applicable to the individual), and 20 ‘‘(II) if such distributions are 21 made during any taxable year during 22 which such unemployment compensa- 23 tion is paid or the succeeding taxable 24 year. 25 VerDate Sep 11 2014 00:34 Feb 10, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H585.IH H585 pbinns on DSKJLVW7X2PROD with $$_JOB 3 •HR 585 IH ‘‘(ii) DISTRIBUTIONS AFTER REEM- 1 PLOYMENT; SELF-EMPLOYED INDIVID- 2 UALS.—Rules similar to the rules of 3 clauses (ii) and (iii) of subparagraph (D) 4 shall apply for purposes of this subpara- 5 graph. 6 ‘‘(iii) LIMITATION.—Clause (i) shall 7 not apply to any distribution to the extent 8 that such distribution exceeds the lesser 9 of— 10 ‘‘(I) $50,000, reduced by the ag- 11 gregate amount of distributions which 12 are described in clause (i) from all 13 plans of the individual during the 1- 14 year period ending on the day before 15 the date on which such distribution 16 was made, or 17 ‘‘(II) the greater of $10,000 or 18 one-half of the aggregate fair market 19 value (at the time of the distribution) 20 of the individual’s qualified retirement 21 plans (as defined in section 4974(c)) 22 and the nonforfeitable portion the in- 23 dividual’s defined contribution plans. 24 VerDate Sep 11 2014 00:34 Feb 10, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H585.IH H585 pbinns on DSKJLVW7X2PROD with $$_JOB 4 •HR 585 IH ‘‘(iv) COORDINATION WITH DISTRIBU- 1 TIONS TO UNEMPLOYED INDIVIDUALS FOR 2 HEALTH INSURANCE PREMIUMS.—Dis- 3 tributions shall not be taken into account 4 under this subparagraph if such distribu- 5 tions are described in subparagraph (D).’’. 6 (b) EFFECTIVE DATE.—The amendments made by 7 this section shall apply to distributions made after Decem- 8 ber 31, 2022. 9 Æ VerDate Sep 11 2014 00:34 Feb 10, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6301 E:\BILLS\H585.IH H585 pbinns on DSKJLVW7X2PROD with $$_JOB

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