Expanding Penalty Free Withdrawal Act

The Expanding Penalty Free Withdrawal Act would modify current tax law to create a new exception to the 10% additional tax penalty on early retirement account withdrawals. Currently, individuals who withdraw money from qualified retirement plans before age 59½ face this penalty unless they qualify for specific exceptions. This bill would add unemployment as a qualifying reason, allowing individuals who receive federal or state unemployment compensation for 26 consecutive weeks (or the maximum allowed under state law) to withdraw funds penalty-free in the same tax year as their unemployment or the following year.

If enacted, the bill would limit penalty-free withdrawals to the lesser of $50,000 per year across all retirement accounts or the greater of $10,000 or half the total value of an individual's retirement savings. However, if the person returns to work for at least 60 days, the 10% penalty would apply to any subsequent distributions. This provision is currently in committee and has not yet been voted on by the full House.