| Tucked into dozens of retirement-related provisions collectively known as "Secure 2.0" is a measure that will soon make it easier for Americans to tap their retirement savings for emergency expenses.
Current rules around hardship withdrawals allow workers to access their 401(k) savings plans before retirement for an "immediate and heavy" financial need. Workers may owe income tax on that withdrawal, and those under age 59½ generally owe a 10% tax penalty for early withdrawal.
The new rules, however, will let savers make one withdrawal of up to $1,000 a year for personal or family emergency expenses. The measure — which takes effect in 2024 and also applies to individual retirement accounts — waives the 10% tax penalty. Americans can self-certify in writing that they need the funds for an emergency.
Taxpayers have the option to repay the funds within three years. They can't take more emergency withdrawals within three years unless they repay the initial distribution or they make regular deposits that at least match the withdrawn amount.
Financial experts, meanwhile, urge people to think before they jump into this option because the overall feeling is that it's generally a terrible idea to take money out of your 401(k) plan.
People should weigh all their available options for cash before resorting to tapping a 401(k) plan, said Ted Jenkin, a certified financial planner and co-founder of oXYGen Financial.
Why? Because unlike a 401(k) loan, savers generally can't pay themselves back when they take a hardship distribution — meaning the savings and its future investment earnings is permanently lost, unless workers can somehow make up for it later with higher savings rates. That means tapping your retirement savings is not only costly in the short-term; it can also jeopardize your long-term retirement goals. You'll be forfeiting the benefits of tax-deferred earnings and compounding interest, which diminishes the savings power of these accounts.
For more advice to help you make smart financial decisions, check out CNBC's Financial Advisor Hub and Personal Finance section. |
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