A recent AARP survey found that more than half of adults over the age of 50 are worried about having enough money for retirement.
New law allows Americans to save more by investing in 401(k)s and other savings accounts Severance pay As an emergency ATM.
New IRS rules allow Americans to withdraw up to $1,000 from their 401(k)s penalty-free if they need the funds to meet an emergency financial need. Permitted reasons for withdrawals include medical expenses, funeral expenses, auto repairs, or “other urgent personal expenses.”
In the past, individuals who made such withdrawals Unpaid income tax Workers may be subject to a 10% early withdrawal fee on the money, and a 10% early withdrawal fee if they are under age 59 1/2. The penalty may be waived if the worker presents sufficient evidence that the money is being used for a certified hardship, such as medical expenses.
People who made hardship withdrawals couldn’t pay the money back into their 401(k), nor could they move the money into another retirement savings account.
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Stacks of retirement account statements. (iStock/iStock)
However, with the implementation of the SECURE Act 2.0 earlier this year, these rules have been relaxed.
Now, Americans will be able to withdraw money from their 401(k) plans or IRAs for emergency expenses without such repercussions. Savers are allowed to make one distribution of $1,000 per year, and the funds must be repaid within three years. Savers will have to pay income tax on the amount withdrawn if they don’t repay it, and they won’t be able to make additional hardship withdrawals.
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However, there are exceptions: You can’t withdraw enough money to bring your account balance below $1,000, and emergency withdrawals are optional in employer plans, so not everyone can participate.
The change comes as more Americans are tapping their 401(k) plans for emergencies amid a period of high inflation that is rapidly eroding workers’ purchasing power.
A retired couple walking arm in arm along the beach. (Annette Riedl/Photo Alliance via Getty Images/Getty Images)
About 3.6% of workers participating in employer-sponsored 401(k) plans made hardship withdrawals in 2023, according to Vanguard data. That’s up significantly from the 2.8% recorded in 2022 and the pre-pandemic average of about 2%. It’s the highest level since Vanguard began tracking the data in 2004.
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The rise in hard-pressed workers withdrawing their savings comes partly from inflation, which has forced most households to spend more on food, rent and other basic necessities — a burden that falls disproportionately on lower-income Americans, whose already-tight take-home pay is more vulnerable to price fluctuations.
As spending on everyday items increases, Americans are on fire More and more people are dipping into their savings and turning to credit cards to cover basic expenses.
But many financial experts are warning savers to avoid emergency withdrawals from retirement accounts if possible.
If you withdraw the money, you risk losing the power of compound interest, plus you’ll get a tax deduction if you don’t pay the money back within three years.
