As expenses continue to squeeze household budgets, Massachusetts residents 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.
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