While the main purpose of the Securing a Strong Retirement Act of 2022 (SECURE 2.0) is to make it easier and more beneficial for people to save for retirement, the legislation also includes a number of provisions that make it less taxing for those under 59½ to use some of their retirement plan assets to pay for unanticipated major expenses.
Keep in mind that it’s almost always better to use money from other sources to pay these expenses, since early withdrawals from retirement accounts could raise your current tax burden and have a detrimental impact on your retirement planning goals.
However, if these resources aren’t available, SECURE 2.0 will give retirement plan participants greater flexibility to put aside money for emergency purposes and withdraw money from their accounts without having to pay IRS early withdrawal penalties under certain conditions.
Emergency fund accounts
Starting in 2024, plan sponsors may allow non-highly compensated plan participants to put aside up to $2,500 in after-tax contributions into a special emergency fund. Withdrawals can be made for any qualified purpose and there are no limitations on how many withdrawals may be made per year. Participants will not have to pay penalties or taxes on these withdrawals. However, once this fund is depleted it can’t be replenished.
A broader range of penalty-free early withdrawal situations
Before SECURE 2.0, plan participants could only make penalty-free early withdrawals in certain situations, such as if they suffered a permanent disability, were hit with significant unreimbursed medical expenses, or lost their job (at age 55 or older).
SECURE 2.0 expands these scenarios. Some are available now, and others will be rolled out over the next few years:
- Starting in 2023, terminally ill participants may start taking early withdrawals.
- Starting in 2023, participants can withdraw up to $22,000 to help pay for losses caused by qualified federally declared disasters that occurred after January 26, 2021.
- Starting in 2024, participants will be able to withdraw up to $1,000 from their retirement account to pay for immediate financial needs due to “unforeseen circumstances.” Only one withdrawal per year will be allowed every three years unless the participant fully repays the withdrawal within the three-year period following the withdrawal.
- Starting in 2024, victims of domestic abuse will be able to withdraw up to 50% of their account balance or $10,000 (whichever is less). Participants who repay these withdrawals to their plan within three years may receive a refund for income taxes they initially paid on the withdrawal.
- Starting in 2025, participants will be able to take early withdrawals of up to $2,500 per year to pay for qualified long-term care insurance contracts.
Keep in mind that while all of these hardship withdrawals are penalty free, money withdrawn from pre-tax accounts may be considered taxable income for that year.
Taking early withdrawals from your retirement accounts to help pay for unforeseen expenses should always be the option of last resort. If you’re facing a financial hardship and need help figuring out which monetary sources to tap first, speaking with a tax professional can help you make decisions that can keep your immediate and future monetary needs in balance.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer before you implement any of these strategies.
This article was authored by Michael Flaherty and Jeffrey Briskin. Michael is a financial advisor at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or firstname.lastname@example.org. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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