I’ve written recently about hardship withdrawals and loans from retirement accounts, specifically when they might be a viable option and the dangers of using them. As of 2024, there’s another option if you need an emergency withdrawal from your retirement plan.
Emergency personal expense distributions
As part of the Secure 2.0 Act, you may now withdraw up to $1,000 per year from retirement accounts like 401(k)s or IRAs without having to pay the 10% penalty. Normally someone withdrawing money from their account before age 59½ would have to pay the 10% penalty along with income taxes. With this new rule, you would only have to pay income taxes for the $1,000 emergency withdrawal.
More lenient definition of emergency
The Secure 2.0 Act not only provided for the new withdrawal, but also left the definition of an emergency more open. The IRS defined it as unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. Examples they listed include money to provide for medical expenses, car repairs, an accident, foreclosure, or burial needs. You simply state in writing that your withdrawal is an emergency to your HR Department.
Payback is optional
If you choose to take this withdrawal, you have the option to pay it back within three years. While many financial articles are calling this a yearly option, you can only take another withdrawal annually if you have either paid back the initial withdrawal or made contributions equal to the withdrawal amount. Otherwise, you must wait three years (or until the withdrawal is repaid, whichever comes first).
Note that not all employers have implemented this into their retirement plans. You need to make sure your employer allows emergency personal expense withdrawals. Additionally, you cannot withdraw so much money from your retirement plan account that you leave the balance below $1,000.
A better option?
While this might be seen as a better option, many of the issues with other withdrawals or loans are echoed here. By withdrawing $1,000, you are removing that money from compounding, which can negatively impact your retirement especially if this becomes habitual and you’re withdrawing $1,000 every year.
Also, there’s the mental aspect. Most people see their retirement plan as a hands-off investment. You’re putting money in for the long term; the government created road blocks in the forms of penalties and taxes to keep you from accessing it. Breaking that mental barrier could lead to you using the account more for today’s purposes versus for your retirement needs.
If you are considering putting $1,000 on a high-interest credit card with no hopes of repaying it any time soon, this type of withdrawal might be a viable one-time financial decision. However, you may be able to cut expenses or add income to get over the hump. If you choose to go forward, consider reviewing your budget and building an emergency fund to reduce the chance that this will be a repeated situation.
Photo by Giorgio Trovato