Performing effectively as a financial advisor requires you to stay up to date on the latest from federal regulators, which at times can pose quite a challenge. The thought leaders at L.M. Kohn have identified a recent update on legislation that advisors should be aware of to provide the best advice to their clients.
The passage of SECURE Act 2.0 in December 2022 left quite a few details up in the air, leaving many advisors asking for guidance from the IRS on the implications for their clients. Thankfully, it appears that this guidance has begun to materialize in the form of IRS Notice 2024-2. While it’s just a start of providing clarification for the number of questions left unanswered by SECURE Act 2.0, the notice does provide some direction for those advisors with clients suffering from a terminal illness.
Section 326 of the notice lists that, for individuals with individual retirement accounts, individual retirement annuities and employer-sponsored retirement plans, and who have been diagnosed with a terminal illness and are under the age of 59½, there will be no 10% penalty for early withdrawals. This new rule applies to 401(k) plans, 403(a) annuity plans and 403(b) annuity contracts.
It’s also important to note that the notice defines “terminally ill” as having been certified by a medical or osteopathic doctor to have 84 or fewer months to live. For purposes of life insurance accelerated death benefits, this definition changes to mean having 24 (or fewer) months to live.
This update is a modification of the existing rules, which encourage savers to keep their money in retirement accounts by enforcing a 10% penalty on withdrawals taken before age 59½. While exceptions to the early withdrawal penalty have been made in the past for qualified higher education expenses and permanent disablement, this is the first update to include terminal illness.
This information would obviously allow an advisor to provide some assistance to retirement savers and their families who find themselves in difficult times.
For more information on SECURE Act 2.0 or help decoding the latest federal regulations and what it means for your clients, please contact us.