Need $1,000 for an Emergency? Now It’s Easier to Tap Your IRA or 401(k)
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Here's your money briefing for Friday, July 19th. I'm J.R. Whelan for The Wall Street Journal. What if you needed cash in a pinch? You could make a withdrawal from your retirement account, but the penalty is often pretty steep. Until now. The IRS is allowing people with IRA or 401k accounts to take out up to $1,000 a year for an emergency.
So there's a specific list, things like medical bills, auto repairs, funeral expenses. But for someone living paycheck to paycheck, that could mean groceries. It's a pretty broad definition.
We'll go over the details with Wall Street Journal personal finance reporter Ashleya Ebling after the break.
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The IRS just made it easier to take out $1,000 from your retirement account.
What new IRS rule lets you withdraw up to $1,000 from your IRA or 401(k)?
Wall Street Journal personal finance reporter Ashleya Ebling joins me. Ashleya, which types of accounts are eligible for these withdrawals?
The new rule applies to regular retirement accounts, not Roth accounts. Basically, it lets you take up to $1,000 out of a pre-tax individual retirement account or 401k penalty free. That's what's new, the fact that you don't have to pay a penalty on the early withdrawal if you're under 59 and a half.
In your story, you say that the IRS is allowing people to take out up to $1,000 for any self-defined emergency. Has the IRS stated what could fall into that category?
So there's a specific list, things like medical bills, auto repairs, funeral expenses. But the thing that's really interesting is this catch-all phrase that just says any other necessary emergency personal expenses. So for someone living paycheck to paycheck, that could mean groceries. It's a pretty broad definition.
Okay, so does there have to be some sort of proof as to why you need the money?
They don't ask for proof up front. When you file your tax return, you'll be checking a box saying that the 10% penalty exception applies because it's an emergency.
So there's a bit of an honor system here, and you don't want to be dishonest on your tax return. Is that what you're saying?
Exactly. And obviously on audit, there could be a question, theoretically.
What steps should somebody take to draw from their account under this rule?
So it depends if it's an IRA or a 401k. If it's an IRA, you would typically just call the administrator or go online and request the distribution. And then you kind of deal with the exception to the penalty on your tax return.
Is this a one-time only $1,000 allowance?
It is one time per calendar year. You can make only one emergency withdrawal a year. And there's this other rule, it's the lesser of $1,000 or your vested account balance over $1,000. And basically that just means, for example, if you only have $1,500 saved in your account, you could only take out $500.
And just to be clear, it's one time only or are people in most cases allowed to make several withdrawals per year not to exceed $1,000?
One withdrawal per calendar year, whatever amount you pick for that withdrawal up to the $1,000.
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