Penalty-Free 401(k) Withdrawals Just Got Easier

As expenses continue to squeeze household budgets, Americans can now tap into their 401(k)s before age 59.5 — without penalty — to cover unexpected expenses. The new rule, which took effect this year thanks to provisions in 2022’s SECURE 2.0 Act, allows retirement savers to borrow up to $1,000 annually from their employer-sponsored plans, and gives savers new flexibility in deciding how to use the funds.

According to Vanguard’s analysis of its retirement plans, hardship withdrawals doubled from 2020 to 2023, rising from 1.7% of plan participants to 3.6%. As Americans increasingly turn to debt to cover everyday expenses like food and school supplies, the option to access a portion of their retirement savings without tight restrictions could be a lifeline.

Previously, early, penalty-free access to 401(k) funds was limited to expenses related to  higher education, first-time home purchases, birth or adoption of a child and the death or permanent disability of the account owner. Now the IRS says you can tap into your balance as a means of “meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”

In layman’s terms, that means everything from groceries and home repairs to medical debt and past-due bills (among other needs) are now eligible expenses. Be mindful, however, that these loans still need to be paid back in full within five years. Failure to do so will lead to penalties, tax consequences and — significantly — setbacks to your retirement savings plan.

Remember: Your 401(k) is a vehicle for growth; do your best not to treat it as your personal ATM.

The average credit card balance grew to $6,329 in the second quarter of 2024, up 20% from two years ago, as Americans continue to deal with the after-effects of inflation. A TransUnion report found that “While the rate of inflation has slowed, balances continue to rise.”

Experts think that the Fed will cut rates sometime by September. This means there is still time to snag a high-rate CD. CDs provide a stable investment with significantly higher returns than traditional savings accounts, some even 10 times as much. Explore various CD options and terms to find the ideal investment for your financial goals. .

Check out Money’s Best CDs of 2024 and get your money making money!

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