Many people have found themselves in situations where an unexpected expense comes up, and they need money quickly. If you planned ahead, you might be able to tap into your emergency fund to cover the expense. But your emergency fund might not be enough, and not everyone has one.
Borrowing money might be possible in some cases, but you’ll have to worry about interest. It also takes time to get apply to be approved. It’s around this time that your retirement account can start looking pretty tempting.
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Thanks to a rule change that took effect in 2024, it’s easier than ever to access your retirement savings for emergencies. But before you do that, it’s important to understand the following two things.
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1. The rules for emergency retirement account withdrawals
The SECURE 2.0 Act, passed at the end of 2022, included a rule change that took effect in 2024. The change allows you to make one distribution per calendar year for personal or family emergencies without paying a 10% early withdrawal penalty. This applies to workplace retirement plans like 401(k)s, as well as IRAs.
You’re limited to the lesser of $1,000 or your vested account balance over $1,000. Here are a few examples to understand the amount you can withdraw under this rule.
Vested Account Balance | Vested Account Balance Over $1,000 | Amount You Can Withdraw |
|---|---|---|
$10,000 | $9,000 | $1,000 |
$1,500 | $500 | $500 |
$800 | $0 | $0 |
Source: Author’s calculations.
If you decide to take one of these emergency withdrawals, you have the option to repay the distribution within three years. This repayment won’t count toward your annual account contribution limit for that year.
That said, you’re not required to repay it. If you don’t, you won’t be able to make another emergency withdrawal for another three years. That’s something to consider when deciding whether it’s the right option for you.
2. The financial consequences of emergency retirement account withdrawals
It’s nice to have the option to access some of your retirement savings for emergencies, particularly when you need cash quickly and have few other options. But it’s important to understand how this move could affect your finances in the near and long term before you proceed.
While you may not have to pay a 10% early withdrawal penalty under this rule, you could still owe taxes on your distribution in the year you make it if it comes from a tax-deferred account like a traditional IRA or 401(k). Since the maximum emergency withdrawal is $1,000, it likely won’t have a significant effect on your tax liability, but it’s something to be aware of nonetheless.
The bigger issue with taking an emergency withdrawal from your retirement savings is that the money is no longer invested. It’s not able to grow any further, so you’ll have to set aside even more money for retirement going forward to make up for those lost earnings.
For this reason, it’s worth considering other options, such as bank loans, payment plans with your creditors, or adjusting your budget before you decide to withdraw funds from your retirement savings. It may still be your best option in some cases, but by reviewing all possibilities first, you can ensure you’re not missing a better way to get the cash you need.
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