What this article covers
Opher Ganel explains how SECURE 2.0 lets savers younger than 59.5 tap their 401(k) or IRA without the 10% early withdrawal penalty after a federally declared disaster, domestic abuse, a personal emergency or a terminal illness diagnosis. He walks through the dollar limits and deadlines for each, the option to repay withdrawals within three years, and why penalty-free doesn’t mean tax-free, with perspective from three financial advisors.
Key Takeaways
SECURE 2.0 waives the 10% early withdrawal penalty in four kinds of emergencies
Savers younger than 59.5 can now withdraw retirement money penalty-free if they are affected by a federally declared major disaster, are victims of domestic abuse, face a personal or family emergency, or are certified as terminally ill. Each provision has its own limits, ranging from $1,000 for a personal emergency to unlimited withdrawals for the terminally ill.
Each emergency withdrawal has its own dollar limit and deadline
Disaster victims can withdraw up to $22,000 within 179 days of the incident, and plans may double loan limits to $100,000. Domestic abuse victims can take up to $10,000 (no more than half the vested balance) within a year of the abuse, while personal emergency withdrawals are capped at $1,000, generally once every three years unless repaid.
You can repay a penalty-free emergency withdrawal within three years
Unlike a normal retirement plan withdrawal, money taken under SECURE 2.0’s emergency provisions can be put back within three years, even into an IRA if you’ve left your employer. Penalty-free still doesn’t mean tax-free, and the advisors interviewed stress using these withdrawals for genuine emergencies only.
And other related benefits of the new legislation…
Less than a year ago I crossed a magical line in the legislative sand…
I turned 59.5.
Yeah, I know, that’s kind of an odd number, isn’t it?
Tell that to Congress though. They made that age a critical milepost in letting us access our own money from tax-deferred retirement accounts such as traditional IRAs and 401(k) plans.
If you’re younger than 59.5 and want to make a withdrawal from your (non-Roth) 401(k), beyond the income taxes you’ll owe on the portion of the withdrawal that comes from investment returns, adding insult to injury, you’ll also need to pay a 10-percent penalty.
How SECURE 2.0 Changed the Rules on Early Retirement Withdrawals
On December 29, 2022, President Biden signed into law a $1.7 trillion omnibus law which included the so-called Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 act.
There’s a lot to like about SECURE 2.0, and here’s one important aspect. It finally lets you access your own money from your 401(k) or IRA without penalty in certain emergencies.
Specifically:
- If you’re affected by a major disaster
- If you or a family member are victims of domestic abuse
- If you suffer a personal emergency
- If you become terminally ill
You can read a fairly complete discussion here, but here are the highlights…
Penalty-Free 401(k) Withdrawals and Loans After a Federally Declared Disaster
If you’re affected by a federally declared major disaster (occurring after January 26, 2021), even if you’re younger than 59.5, you can withdraw up to $22,000 from your 401(k), 403(b), or 457(b) plan (but no more than the money you have in your account) without the 10-percent penalty.
What does it mean that you’re affected by the disaster?
It means your “principal place of abode” was in the affected area at any time during the period defined by the federal disaster declaration and that the disaster caused you an economic loss.
For example, a hurricane or a major flood might have damaged your house, and you need to pay a contractor to make repairs.
To take advantage, you must make the withdrawal within 179 days of the start of the incident (but if you haven’t yet, you have until June 27, 2023).
If your plan sponsor chooses, it can temporarily double the allowed limit of retirement-plan loans to $100,000 (but no more than your full vested balance).
The sponsor can also let you suspend loan payments for up to a year.
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Penalty-Free Retirement Withdrawals for Victims of Domestic Abuse
For many 401(k), 403(b), and 457(b) plans, starting next year, you’ll be able to withdraw up to $10,000 (but no more than half of your vested balance) with no penalty in cases of domestic abuse by your spouse or domestic partner.
The abuse could be against you, your child, and/or another family member in your household.
To take advantage, you’ll need to make the withdrawal within a year of when the abuse happened.
As Jonathan Bird, CFP®, CWS®, wealth advisor at Farnam Financial says:
Getting out of an abusive relationship is profoundly difficult. Being able to take up to $10,000 from your 401k balance makes that challenge a little bit easier. Women can also use free financial resources such as Savvy Ladies to help them take positive steps for their financial future.
The $1,000 Personal Emergency Withdrawal and Emergency Savings Accounts
This is another benefit available starting next year.
If you suffer a personal or family emergency that causes immediate unexpected costs, you can withdraw without penalty up to $1000 (but you must leave at least $1000 in the account).
You can make such withdrawals once every three years.
However, if you return the $1000 (or make $1000 worth of salary deferral contributions to the plan), you can take another penalty-free withdrawal the following year.
Related to this, the new law allows plan sponsors to set up an emergency savings account linked to their retirement plan. If your employer does this, you can put up to $2500 into this emergency savings account.
You can then withdraw the full amount you have in the plan any time you suffer emergency expenses.
Penalty-Free Retirement Withdrawals If You Are Terminally Ill
This one hits emotionally close to home, as I sit and write this in my terminally ill sister’s house.
If you’re terminally ill, which for SECURE 2.0 means that your physician certifies you’re reasonably expected to live no more than 84 months (7 years), the new law lets you make any number of withdrawals of any amounts you have in your retirement plans.
Can You Repay an Emergency Retirement Withdrawal? Yes, Within Three Years
Normally, if you withdraw money from your retirement plan, not only will you have to pay taxes and possibly penalties, you can’t ever put the money back in (though you may be able to make new contributions within the relevant IRS limits), which impacts your retirement.
Take advantage of any of SECURE 2.0’s new penalty-free-withdrawal clauses, however, and you have up to three years from the withdrawal to repay up to the full amount of that withdrawal.
You can even repay it into an IRA (which is helpful especially if you’ve since left your employer).
Are SECURE 2.0 Emergency Withdrawals Taxable? Penalty-Free Doesn’t Mean Tax-Free
If you withdraw money from your retirement plan under any of the above circumstances, you won’t have to pay the 10 percent penalty even if you’re younger than 59.5.
However, you’ll need to pay taxes on the earnings portion of the withdrawn amounts.
The Bottom Line: Emergency Access Is Helpful, but Use It for Emergencies Only
Retirement plans are there to fund our retirement, not everyday pre-retirement expenses.
However, the reality is that life hits too many of us with financially debilitating circumstances. When that happens, being able to access your retirement money without penalty can be enormously helpful.
That’s exactly what SECURE 2.0’s new emergency withdrawal provisions are designed to do.
Then, once you’ve recovered from the emergency (at least if that’s within three years), you can even put the money back into your retirement plan (or an IRA), to reduce the long-term impact on your retirement.
P. Timothy Uihlein, CFP®, MBA, Partner, Managing Director, and Senior Wealth Manager at Vincere Wealth Management sees this (as do I) as a positive development, saying, “Finally, clients have some options for accessing funds to get through short-term hurdles without the costs and time associated with obtaining a bank loan.”
Kevin M. Arquette, CFP®, Wealth Manager, Managing Partner, Wealthpoint Financial Planning caution us, however:
It’s crucial clients be aware of these expanded criteria for penalty-free withdrawals from their employer retirement plans for emergencies. Given the complexity of the tax code, they may not be familiar with these provisions. However, it’s important to use such withdrawals for emergency purposes only. To ensure you make the best decisions for your financial situation, work with a qualified financial advisor who can provide personalized advice and suggest alternative ways to fund temporary shortages in funds.
Tax law is notoriously unloved, even by many tax pros. But this time, Congress managed to make the tax code a little bit better.
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Frequently Asked Questions
Can I withdraw from my 401(k) without penalty in an emergency?
Yes, in certain cases. Under SECURE 2.0, savers younger than 59.5 can avoid the 10% early withdrawal penalty if they are affected by a federally declared major disaster, are victims of domestic abuse, suffer a personal or family emergency with immediate unexpected costs, or are terminally ill. Each situation comes with its own limits and rules.
How much can I withdraw from my 401(k) after a natural disaster?
If a federally declared major disaster caused you an economic loss and your principal residence was in the affected area, you can withdraw up to $22,000 from a 401(k), 403(b) or 457(b) plan without the 10% penalty. The withdrawal must be made within 179 days of the start of the incident. Your plan sponsor may also double the retirement-plan loan limit to $100,000 and let you suspend loan payments for up to a year.
What is the SECURE 2.0 $1,000 emergency withdrawal?
If you suffer a personal or family emergency that causes immediate unexpected costs, you can withdraw up to $1,000 penalty-free, as long as at least $1,000 stays in the account. You can generally take one such withdrawal every three years, but if you repay the $1,000 (or make $1,000 worth of salary deferral contributions), you can take another the following year.
Can terminally ill people withdraw retirement money without penalty?
Yes. For SECURE 2.0 purposes, you are terminally ill if your physician certifies you are reasonably expected to live no more than 84 months (seven years). In that case, you can make any number of penalty-free withdrawals of any amount you have in your retirement plans.
Are SECURE 2.0 emergency withdrawals tax-free?
No. These withdrawals avoid the 10% early withdrawal penalty, but they are not tax-free, so you should expect to owe income tax. You can, however, repay the withdrawal within three years, including into an IRA, to reduce the long-term impact on your retirement. One advisor interviewed recommends working with a qualified financial advisor who can suggest alternative ways to cover temporary cash shortfalls.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.