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Between the soaring cost of living and sky-high interest rates, average Americans are strapped for cash<\/a>, making it difficult to save for emergencies\u2014or pay them off when they inevitably crop up. But a recent change in tax law makes it easier than ever to tap into your retirement account for $1,000 in case of emergency, penalty-free.<\/p>\n Typically, an early withdrawal from a tax-advantaged retirement account is not only taxed at the saver\u2019s ordinary rate, but also faces a 10% penalty. Before this year, there were a number of limited circumstances\u2014including birth or adoption<\/a> and for first-time homebuyers\u2014in which someone could withdraw funds from their pre-tax retirement account before age 59\u00bd<\/a>. (Savers can always withdraw contributions<\/a> to a post-tax Roth IRA tax with no penalty.)<\/p>\n Those rules were eased this year. Since January, penalty-free withdrawals of up to $1,000 have been allowed for personal emergencies, under the SECURE Act 2.0<\/a>, which made other significant changes to retirement plans<\/a>. An emergency expense in this case is not defined under the law; it can include funds to pay<\/a> for \u201cunforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.\u201d The law also created new exceptions for disaster relief, those with a terminal illness, and domestic abuse survivors.<\/p>\n In the past, withdrawing the money might have been a time-consuming task involving plenty of paperwork, but the new rules for personal emergencies speed up the process. Savers will still need to pay income tax on the withdrawal if they don\u2019t pay it back, as they contributed to a 401(k) and traditional IRA pre-tax. In the case of a 401K, they do need to self-certify with their employer that they withdrawal is for an emergency. <\/p>\n The change comes as an increasing number of Americans are making hardship withdrawals from their retirement accounts. According to Vanguard<\/a>, a record 3.6% of the 5 million accounts<\/a> it administers saw an early withdrawal in 2023, up from 2.8% the year before. <\/p>\n There are a few catches<\/a>: Not all employers have opted into the change, meaning you might not be able to tap into your 401(k). It can only be done once a year at most. And you can\u2019t withdraw so much that you leave your account balance below $1,000. <\/p>\n You have three years to repay the money, though you don\u2019t have to. That said, during those three years, no other emergency distributions can be taken<\/a> out of the account unless the money is repaid or new contributions are made that are at least equal to the withdrawal.<\/p>\n While the change could be helpful to many people struggling to pay bills or dealing with an emergency\u2014and is a better option than running up credit card debt or taking out a payday loan\u2014savers should avoid treating their retirement account like an ATM, to the best of their ability. <\/p>\n After all, retirement accounts are the bulk of many households\u2019 total savings. While $1,000 may not seem like much to spend now, it means losing an untold amount in future compounding returns. <\/p>\n Additionally, not repaying the distribution will also change a saver\u2019s tax situation, which they should understand before they go through with it. Most financial advisors agree that a hardship withdrawal should be a last resort<\/a>.<\/p>\n<\/div>\n\nBe careful with early withdrawals<\/h2>\n
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