ALLENTOWN, Pa. — The IRS has made it easier to access emergency funds from your 401(k), now allowing you to withdraw $1,000 penalty-free for a “self-defined” emergency.
“The reason this is an exception is because if you’re under 59.5 and you withdraw funds from a retirement account, you have to pay a 10 percent penalty in addition to the tax you’d normally pay on your income. This allows you to take the distribution without paying the 10 percent penalty,” said Bill Bross of RLB Accounting in Allentown.
Bross said the provision was included in the SECURE 2.0 Act, but although the act was signed into law last year, it did not go into effect immediately.
Note: Not all 401(k) plans have adopted this provision.
You’ll have three years to get your money back, and then you can withdraw another $1,000, but only once a year.
Bross says that while this is a way to get quick cash, it really should be a last resort.
“If you take a distribution, you’re missing out on $1,000 in gains and compound interest, regardless of age, that you could have enjoyed if the money was still there,” Bross said.
The legislation also allows victims of domestic violence to withdraw up to $10,000 in retirement benefits.
“If your employer sponsors a 401(k) plan, they must allow this distribution, but even if they don’t, there are ways around it, so talk to your tax advisor about it,” Bross said.
