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Tax-Favored Withdrawals from Retirement Plans
The Federal law imposes an additional tax on early distributions from qualified retirement plans. The Consolidated Appropriations Act (CAA), 2021 (Section 302) provided an exception to the early withdrawal tax by allowing special disaster-related rules for retirement funds. The CAA, 2021 provisions were temporary, and this federal provision makes some of those rules permanent.
Specifically, the provision waives the 10 percent early withdrawal tax for qualified disaster distributions (QDD), in connection with a federally declared disaster, up to $22,000 from a qualified retirement plan. The distribution is taxed ratably over a three-year period, unless the taxpayer elects otherwise, and may be recontributed within three years, with repayments receiving direct rollover treatment.
A qualified individual is defined as having a principal place of abode at any time during the incident period that is located in a qualified disaster area and has suffered an economic loss as a result of the qualified disaster.
Recontributions of Withdrawals for Home Purchases
This provision allows individuals who received qualified distributions to recontribute those qualified distributions into an eligible retirement plan to which a rollover contribution could be made. The provision also waives the 10 percent early withdrawal tax for such qualified distributions. A qualified distribution must be: (1) a qualified first-time homebuyer distribution; (2) which was used to purchase or construct a principal residence in a qualified disaster area, but which was not used due to the qualified disaster in the area; and (3) must have been received during the period beginning on a date which is 180 days before the first day of the incident period and ending on the date which is 30 days after the last day of the incident period. The repayment period (known as the “applicable period”) runs from the period beginning on the first day of the incident period and ends 180 days after the applicable date with respect to such disaster.
Loans from Qualified Plans
The provision also enables qualified individuals (as described above) to receive retirement plan loans in amounts up to the lesser of $100,000 or the present value of the nonforfeitable accrued benefit of the employee under the plan. Repayment on these loans may be suspended for a period of up to one year if repayment of the loan normally would be due during the period beginning on the first day of the disaster incident period and ending 180 days from the last day of such incident period.
Tax-Favored Withdrawals from Retirement Plans
California conforms to IRC section 72(t), additional tax on early distributions from qualified plans as applicable for federal purposes for the same taxable year using a rate of 2 ½ percent in lieu of the federal tax rate. (RTC section 17085(c)(1).) The qualified disaster distribution would not be subject to a California early withdrawal tax if they are not subject to the federal additional tax on early distributions.
Recontributions of Withdrawals for Home Purchases
Under RTC sections 17501, California automatically conforms to the federal changes made to Part I of Subchapter D of Chapter 1 of Subtitle A of the Internal Revenue Code, which includes IRC section 402. Additionally, RTC section 17082 conforms to IRC section 72(t) regarding additional tax on early distributions from qualified plans as applicable for federal purposes for the same taxable year using a rate of 2 ½ percent in lieu of the federal tax rate. Therefore, the federal changes made by this provision with respect to recontribution of withdrawals for home purchases automatically applies under California law.
Loans from Qualified Plans
RTC section 17081 conforms to IRC section 72(p) regarding loans from qualified plans as of the specified date of 1/1/2015, and generally treats loans from a qualified employer plan as a distribution unless specified conditions are met. Therefore, the amendments to IRC section 72(p) for loans from qualified plans would not apply for California purposes.
RTC section 17085(f) conforms to Section 2202(b) of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act), PL 116-136 relating to qualified retirement plan loans from certain retirement plans for coronavirus-related relief.
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