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The New Rules for Your 401(k)

The Secure 2.0 Act introduced some important new rules surrounding 401(k)s.

What you need to know

The IRS has introduced new rules to provide some relief and flexibility for individuals facing financial hardships. With inflation relentlessly driving up the cost of everyday goods, many Americans are finding their savings depleted and are increasingly resorting to credit cards to cover basic expenses. As a result, a growing number of individuals are turning to their 401(k) accounts for financial relief in emergencies.

In an effort to make borrowing from a 401(k) easier, the IRS is allowing Americans to withdraw up to $1,000 from their 401(k)s to pay for medical care, funeral expenses, auto repairs, or “any other necessary emergency personal expenses.” Only one $1,000 distribution may be made per year, and the funds must be repaid within three years. If the amount is not repaid, it will need to be reported as income and subject to income taxes.

You cannot withdraw $1,000 if your balance will drop under $1,000, and you will also have to make sure your employer’s 401(k) plan provider allows for these withdrawals as well.

While 401(k)s will now provide additional liquidity for Americans to borrow from, it’s important to remember that there are alternative ways to prepare for financial hardship. The first line of defense against an emergency is an emergency fund. This type of fund should hold anywhere from 3-9 months of expenses in the case your income is reduced or stops completely, or that a large expense suddenly occurs. For most people, a emergency fund will be several thousand or even dozens of thousands of dollars depending on that person’s typical expenses.

This week’s quiz

Question 1

Question 2

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Answers

Question 1

Answer: B

The five-year period begins on January 1 of the year in which you made your first contribution to any Roth IRA. For example, if you made your first contribution to a Roth IRA on July 1, 2019, the five-year period starts on January 1, 2019. Therefore, you would meet the five-year requirement on January 1, 2024.

Question 2

Answer: C

The 4 percent rule suggests that retirees can withdraw 4 percent of their retirement portfolio in the first year of retirement. In subsequent years, they adjust this amount for inflation. For example, if you retire with a $1 million portfolio, you would withdraw $40,000 in the first year. If inflation is 2 percent, you would increase your withdrawal by 2 percent in the second year, taking out $40,800, and so on.