Great news! The IRS has clarified a part of the Secure 2.0 Act (only took two years) and now employees can more easily than ever raid their 401(k) plans.
That’s right, once per year, you can take out money from your active 401(k) plan up to $1,000 without having to prove a specific hardship. You don’t have to pay the 10% early withdrawal penalty, but you will owe income tax on the withdrawal.
Under the new rule, an “emergency” could be:
- Car repair
- Elaborate main-pedi with Swarovski crystal inlays
- Medical bills
- Your buddy’s bachelor party in Vegas
- Funeral expense
- Buy-one-get-one-free skydiving class, limited time only!
Yep, just about anything. As long as you leave $1,000 in the retirement account, you can take up to $1,000 out annually without paying the 10% early withdrawal penalty.
What might this cost you? Well, to get $1,000 out of the 401(k), you will have 20% tax withheld, so right away, you are only getting $800 to use.
If this $1,000 withdrawal thing becomes a habit, here is a possible downside:
- $1,000/year withdrawn for 20 years with 6% average annual return lost.
- Potential lost savings after 20 years: $40,000
So, you got $16,000 ($800 x 20) to use, but you lost $40,000 of your retirement nest egg.
As always, I encourage you to look at your 401(k) or other retirement accounts a sacred pact between Today You and Retirement You.
Don’t let Retirement You down by not planning for emergencies, trips, and extravagances to be paid without the aid of your retirement accounts. Even if the IRS says it’s okay.
