Growing your family is one of life’s most joyful milestones. But between medical or legal expenses, new family necessities, childcare costs, and potential income changes, it can also create financial challenges.
To help with these costs, new parents can withdraw up to $5,000 from their retirement accounts without an early withdrawal penalty through what’s known as Qualified Birth or Adoption Distributions (QBADs). In this article, we’ll explain what QBADs are, which retirement accounts qualify, who’s eligible, timing requirements, tax implications, and strategies to maximize this financial option for your growing family.
What is a Qualified Birth or Adoption Distribution (QBAD)?
A QBAD is a penalty-free withdrawal of up to $5,000 from eligible retirement accounts following the birth or legal adoption of a child. This provision, introduced as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in December 2019, allows new parents to access retirement funds without facing the usual 10% early withdrawal penalty that typically applies to distributions taken from qualified (i.e., tax-advantaged) retirement accounts before age 59½.
Keep in mind, while QBADs eliminate the 10% early withdrawal penalty, the IRS still considers the distribution to be taxable income in the year you take it.
Which Plans Qualify for a QBAD?
Not all retirement accounts are eligible for QBADs. The following types of accounts may offer this distribution option:
- 401(a) qualified defined contribution plans
- 403(a) annuity plans
- 403(b) annuity contracts
- Governmental 457(b) plans
- IRAs (traditional, rollover, and in some cases, Roths)
While IRAs automatically allow these distributions, employer-sponsored plans like 403(b)s aren’t required to offer them. If you’re considering a QBAD, check with your HR department first to see if your retirement plan at work offers this option.
Who is Considered an Eligible Adoptee?
For adoption-related distributions, the child must be under the age of 18 or physically or mentally incapable of self-support. Be aware that you won’t qualify for a QBAD if you are adopting your spouse’s child.
When Can You Take a QBAD?
To make sure your QBAD qualifies for the penalty exception, keep these timing guidelines in mind:
- You must take the withdrawal after your child is born or the adoption is final.
- You must take the distribution within one year of your child’s birth or when you legally finalize the adoption.
- You cannot take the distribution before either of these qualifying events.
For example, if your child is born on May 15, 2025, you have until May 14, 2026 to take your QBAD.
Are There Tax Implications?
Yes, QBADs come with important tax considerations:
- Penalty-free doesn’t mean tax-free: While you avoid the 10% early withdrawal penalty, the IRS still considers the distribution to be taxable income in the year you take it.
- Child tax credits may reduce your tax bill: The Child Tax Credit ($2,000 per qualifying child under current tax law) may help offset some of the taxes you may owe on the distribution.
- Repayment option: The SECURE Act allows you to repay the distributed amount back to your retirement account, such as your IRA or 401(k), helping you replenish your retirement savings and reduce the long-term impact of the distribution. Repayments can be made to qualified plans that accept rollovers. To date, the IRS has not set a time limit for repayments, giving you the flexibility to replenish your retirement account when it makes sense for your financial situation.
Advanced Tax Planning for Couples
The $5,000 limit applies to each parent and each child. This means:
- Each parent can withdraw up to $5,000 from their own eligible retirement account (for a total of $10,000 per couple).
- For multiple births or adoptions (such as twins), each parent can withdraw up to $5,000 per child.
- There is no lifetime limit — each new birth or adoption qualifies for a new distribution.
If both parents plan to take the full $5,000 distribution, consider splitting the distributions between tax years. Doing so can potentially reduce the amount of taxes you’ll pay, especially if you’re in a higher tax bracket.
For example, if your child is born in November 2025, one parent could take their distribution in December 2025, while the other parent could wait until January 2026. This strategy could put you in a lower tax bracket each year, potentially saving you hundreds in taxes compared to taking both distributions in the same year.
Make the Most of Your Financial Options for Your Growing Family
While QBADs provide a helpful financial tool for new parents, it’s important to consider how they fit into your overall financial plan. Taking money from retirement accounts early can impact your long-term financial security, even with the ability to repay the distribution later.
At Blankinship & Foster, our team of financial advisors specializes in helping families navigate important financial decisions during life transitions. We can help you determine whether a QBAD makes sense for your situation and recommend other strategies to manage the financial implications of a growing family.
Many of our clients find this information valuable not only for their own financial planning but also for supporting their adult children who may be starting or growing their families. Sharing these financial strategies across generations can be an important part of your family’s overall financial well-being.
Our comprehensive financial planning services for pre-retirees and retirement planning can help ensure short-term financial decisions support your long-term financial security. We stay up to date on the latest legislation, including SECURE Act 2.0, to provide you with informed guidance every step of the way. Contact us to learn more about how we can help you make financial decisions that support your growing family’s needs and goals.