Using Your Retirement Account as an Emergency ATM Just Got Easier - WSJ

There is a new, interest-free, penalty-free option if you need a quick $1,000.

The Internal Revenue Service has now made it easier to take a limited amount of money out of a traditional retirement account penalty-free. While previously you could tap your savings without penalty in more limited ways, and often with more paperwork, you can now take out up to $1,000 of your funds for any self-defined emergency. The $1,000 provision is different from other retirement-account withdrawal options because you can just say that you have an emergency, without specifying what it is. So you can get the money faster. It is one of several ways Congress keeps making it easier for people to use their retirement savings as emergency funds.

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- The new $1,000 emergency-expense provision is optional for employer plans. As of now, not all 401(k) plans have adopted it.

- You can make only one emergency withdrawal a year. If your account is small, you can’t take out so much that the balance would then be under $1,000. For example, if you have $1,500 saved, you can take out only $500.

- You have only three years from the day after the withdrawal to put the money back—whether into the same account you took it out of, or into another retirement account in your name. But you don’t have to.

- You can’t take another emergency withdrawal for the three years after the year you took the money out, unless you repay yourself or make enough new contributions.

- There isn’t a penalty for failing to put the money back in.

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You have to pay income tax on your pretax emergency cash if you don’t put it back.

You claim the exception to the 10% penalty on your tax return.

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