Need $1,000 Fast? A New IRS Rule Lets You Pull It out of Retirement Savings

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Learn how the new emergency personal expense withdrawal rule works and how it can impact your retirement plans. [[{“value”:”

Pulling money out of retirement accounts generally means paying income tax on the withdrawal, plus a 10% penalty. There’s a good reason for this — the more you pull out of your retirement accounts, the less you’ll have to live off in retirement. You’re also forfeiting any future growth.

But a new IRS rule passed as part of the SECURE Act 2.0 in July of this year allows Americans to withdraw $1,000 a year from their 401(k) or IRA for emergency personal expenses. Here’s what this means and why you should tread carefully.

How the emergency personal expense withdrawal works

The SECURE Act 2.0 allows Americans to withdraw $1,000 for emergencies, but there are some caveats. First, the withdrawal can’t take your retirement account balance under $1,000; you’ll also need to pay it back in three years or pay income tax on the money.

There are some loose rules regarding what money can be used for, but the IRS specifically states, “Whether an individual has an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses is determined by the relevant facts and circumstances for each individual.”

Examples provided include:

Medical careLoss of property to an accidentPaying burial or funeral expensesAuto repairsAny other necessary emergency personal expenses

To apply for the emergency withdrawal, you’ll need to reach out to your plan administrator, who can request a written statement proving the withdrawal is genuinely a need. It’s also worth noting that this rule allows your retirement plan to offer this withdrawal, but doesn’t require that the provider offer it.

Consider the loss of long-term growth

You can use the emergency withdrawal provision once a year as long as your retirement account balance stays above $1,000. However, before you do, make sure you know how this could affect your long-term retirement savings.

If you pull $1,000 from your account today, you’re not just lowering your overall retirement account balance; you’re also losing out on long-term growth if you don’t pay it back.

The average return rate for a 401(k) is between 5% and 8%, which means you could lose out on an additional $490.83 and $1,219.64 in growth over the next 10 years for each withdrawal. Plus, if you don’t pay it back, you’ll have to pay income tax on the withdrawal.

Should you use the emergency personal expense withdrawal?

Most Americans cannot cover a $1,000 emergency expense from their savings account. If you’re about to lose your job because you can’t get your car fixed, then use the withdrawal. If knowing you can pull money out means you are more comfortable going to the doctor, then use the withdrawal.

But do your best not to use this withdrawal method if you can avoid it. The magic of investing happens when your money has time to grow. First, pull from all other accounts, including savings and post-tax investment accounts. For example, if you have a certificate of deposit (CD), it might be worth paying the fee to withdraw the money early.

However, having the option to pull money from retirement accounts without a penalty can provide a safety net for many people — just use it wisely.

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