It is easier to take up to $1,000 out of retirement plan savings to help with an emergency under a new rule from the Internal Revenue Service. The IRS announcement clarifies a 2022 law that aimed to reduce paperwork, costs and delays when savers tap retirement funds to cover unexpected expenses. Previously, withdrawing retirement funds before retirement generally meant paying penalties as well as income taxes except in a handful of special situations. Now savers can take early withdrawals for any need they consider urgent without owing penalties. Withdrawals are limited to $1,000 per year and have to be repaid within three years or income taxes are due. A financial advisor can help you evaluate options for covering unexpected expenses.
When the Secure 2.0 Act was passed in 2022, it contained a provision expanding savers’ ability to use tax-deferred retirement accounts including IRAs and 401(k) plans as general-purpose emergency funds without incurring penalties. Previous rules allowed penalty-free early withdrawals before age 59 ½ only in a limited number of circumstances, such as needing a down payment to buy their first home in some cases.
Until the IRS issued its new rule in July 2024, however, nothing really changed. Retirement savers could only take early withdrawals from retirement funds if they paid penalties and taxes, qualified for one of the hardship exemptions or took loans from 401(k) plans, all of which typically involved significant cost, delay or both, compared to the solution set up in Secure 2.0.
Under the new rule, savers can take up to $1,000 from a retirement plan once a year. Rather than having to show that they meet a special situation, they can state they are using funds for everyday emergencies such as car repairs or medical bills. Or they can simply say funds are needed for unspecified emergency personal expenses.
They can withdraw the funds without owing penalties, even if the withdrawal occurs before age 59 1/2. The withdrawals aren’t treated as loans, like a loan from a 401(k) account would be. However, if the money is replaced in the account within three years, no taxes are due either.
Only one emergency withdrawal of up to $1,000 can be made per year. The account balance has to be at least $1,000 after the withdrawal, so on smaller accounts a lower cap would apply to the withdrawal in order to keep the remaining account balance at $1,000.
Usually, taking money out of your retirement account should be a last resort. Consult a financial advisor for professional advice about ways to make your assets work for you.
Having a rainy-day fund of three to six months of expenses where it is safe and readily available is still the most effective way to be prepared for emergencies. And there are other ways to use retirement funds for emergencies. For instance, if someone saves for retirement using a Roth account, contributions can be withdrawn at any time for any reason without owing penalties or taxes.
Compared to existing options, the new emergency withdrawal rule provides savers facing unexpected expenses with a potentially useful new possibility. It does have limitations and potential drawbacks, including:
Get matched with a financial advisor who can help you stay on top of changing legislation and allocate your investments accordingly.
Final IRS rules on a feature of the Secure 2.0 Act, make it possible for people under age 59 ½ with tax-deferred retirement accounts to take up to $1,000 per year from the plans without owing penalties. Withdrawals can be taken to fund any need the saver considers an emergency, without having to meet previously strict eligibility requirements. If paid back into the account within three years, the money isn’t subject to income taxes either.
Photo credit: ©iStock.com/Brankospejs
Mark HenricksMark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
Read More About Retirement
More from SmartAsset
SmartAsset Advisors, LLC ("SmartAsset"), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. Securities and Exchange Commission as an investment adviser. SmartAsset's services are limited to referring users to third party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States that have elected to participate in our matching platform based on information gathered from users through our online questionnaire. SmartAsset receives compensation from Advisers for our services. SmartAsset does not review the ongoing performance of any Adviser, participate in the management of any user's account by an Adviser or provide advice regarding specific investments.
We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
