/biz/ - Business & Finance

[Anonymous No.55630763]

Since this was just passed only a few months ago, I thought I would share this in case it could help someone in the future.

While this 100% should not replace a well-funded emergency fund, it can help in certain situations. There's a saying that in life, when it rains, it pours. It's possible to have a strong emergency fund that can make it through most emergencies, but a costly single emergency or multiple at once are much more difficult to plan for.

Normally, when withdrawing early from a 401k a 10% penalty is taken from the amount withdrawn as well as income tax. The SECURE 2.0 act passed in December 2022 put in place multiple situations in which this penalty does not apply, allowing you to take from a 401k and only pay income tax on the amount withdrawn. The income tax can also be refunded if the money is replaced within 3 years. The new exceptions are $22k in disaster relief related to a federally declared disaster, terminal illness, the lesser of 50% of the account or $10k for expenses related to domestic abuse, and, the most generally applicable, $1k for expenses related to personal or family emergencies. While half are already in effect, the last two will be effective in 2024.

Again, this should never replace a traditional emergency fund. The alternative often given is pulling from a Roth IRA as the contributions to that account can be pulled penalty-free. The issue with that solution is it is much easier to reach the contribution limit on IRAs compared to 401ks in a given year, meaning the money taken out can never be replaced. With some extra saving, putting more money into the 401k within 3 years means the amount withdrawn basically never left, other than stocks and bonds needing to be liquidated at the time of withdrawal and reinvested later.