Bryan D. from Kissimmee, FL asks: Hello Mitch, it’s my understanding that people can now withdraw $1,000 from a 401(k) for just about any emergency purpose, without paying a penalty. Is that correct?
Mitch’s Response:
Thanks for writing, Bryan. You are indeed correct – as part of the SECURE 2.0 Act passed a couple of years ago, it is now possible for individuals to withdraw $1,000, penalty-free, from a 401(k) or another retirement plan account for a personal emergency or family expense.
The law lays out a few applicable emergencies like medical care, funeral expenses, or auto repairs. Still, a key phrase in the law makes the $1,000 withdrawal available for “any other necessary emergency personal expenses.” Which is to say, anything you define as an emergency can be classified as such.1
There is some fine print in the law to be aware of, however, and I also have some thoughts on how investors should think about withdrawing money from a retirement plan.
First, the fine print. This new $1,000 emergency expense provision is optional for employer plans, so it may be that your company has yet to adopt it. It’s important to check with your employer and/or the retirement plan administrator first. You can also only make one emergency withdrawal a year, but you cannot take one every year unless you put the money back each time. You have three years to put the money back.
Ensure Your Retirement Savings Never Runs Out
Retirement is your chance to embrace new adventures and cherished moments. To ensure your golden years are as fulfilling as you’ve imagined, it’s crucial to plan your finances wisely.
I recommend discovering proven strategies and best practices to secure your financial future. Our free guide, 4 Strategies for Spending Money in Retirement2 offers some guidelines to help ensure your retirement nest egg lasts as long as possible. You’ll also get insight on:
- Spending 101: Understanding tax buckets
- The 4% rule
- Dynamic spending with the 5% rule
- And more…
If you have $500,000 or more to invest, download our guide 4 Strategies for Spending Money in Retirement.2 Simply click on the link below to get your copy today!
Download Zacks Guide, 4 Strategies for Spending Money in Retirement2
Those are all key considerations, but the most important thing to understand about 401(k) emergency withdrawals is that you owe income tax on money withdrawn. If you take out the full $1,000 for an emergency, you won’t pay the 10% early withdrawal penalty but you will pay income tax on the amount. It’s important to plan for that.
Emergencies happen, so it’s good to see that the 10% early withdrawal penalty has been scrapped. But the spirit of that penalty should still be on investors’ minds. In other words, I strongly advise against tapping into retirement savings for pre-retirement income needs. Retirement savings and investments are just that—for retirement. Pulling money out affects the long-term growth trajectory, and it means having less money in the account to compound over time.
As a general rule, I advise investors and all households to keep at least one years’ worth of cash available for emergency purposes in a non-retirement account, like an interest-bearing savings account or a money market fund, for instance. Beyond the years’ worth of cash, I think people should invest their assets in accordance with longer-term growth, income, and liquidity needs.That way, when an emergency comes up, you won’t need to worry about tapping retirement savings or having to assume debt to cover it.
Now, if you’re an investor who’s looking for advice on what to do with your money during retirement, I recommend taking a look at our exclusive guide, 4 Strategies for Spending Money in Retirement3.
In this guide, we cover essential strategies and best practices for creating an effective retirement spending plan. You’ll discover:
- Spending 101: Understanding tax buckets
- The 4% rule
- Dynamic spending with the 5% rule
- And more…
If you have $500,000 or more to invest and are ready to learn more, click on the link below to get your copy today!
Disclosure
1 Wall Street Journal. July 15, 2024. https://www.wsj.com/personal-finance/retirement/using-your-retirement-account-as-an-emergency-atm-just-got-easier-2ab939ba?mod=personal-finance_lead_pos1
2 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Strategies for Spending Money in Retirement offer at any time and for any reason at its discretion.
3 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Strategies for Spending Money in Retirement offer at any time and for any reason at its discretion.
DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.
This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.
Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.
It is not possible to invest directly in an index. Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses.
The ICE U.S. Dollar Index measures the value of the U.S. Dollar against a basket of currencies of the top six trading partners of the United States, as measured in 1973: the Euro zone, Japan, the United Kingdom, Canada, Sweden, and Switzerland. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.