Planning Article
September 2024 – By Tom Rueger CFP®
More people than ever are tapping into their 401(k)s and IRAs to manage financial emergencies. According to the Vanguard Group, early withdrawals from retirement accounts reached an all-time high of 3.6% in 2023, up from 2.8% the previous year.
An individual can always withdraw money from their retirement account, but for those younger than 59½, withdrawals are subject to regular federal income tax plus an additional 10% tax penalty. This makes retirement account withdrawals a less beneficial option for someone facing an unexpected financial emergency.
However, beginning in 2024 a provision in the Secure 2.0 Act will allow individuals to take an early “emergency personal expense distribution from their retirement account to meet unforeseeable or immediate financial needs related to necessary personal or family emergency expenses.” The emergency distribution from the qualified plan (e.g., 401(k), 403(b), 457(b)) or IRA (including SEP and Simple IRAs) can be up to $1,000. It can only be taken once during the year, but it won’t be subject to the usual additional 10% tax that normally applies to early distributions. Generally, the individual still must pay ordinary income taxes on the withdrawal. If they choose not to repay the distribution within three years, they cannot take another personal expense distribution during that period. The person only needs to self-certify in writing to their employer that the withdrawal is necessary due to an emergency.
What qualifies as an unforeseeable or immediate financial need related to necessary personal or family emergency expenses? The IRS provided some general examples including medical expenses; accident or loss due to casualty; auto repairs; foreclosure or eviction; or funeral/burial expenses.
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