IRS makes it easier to tap retirement accounts for emergencies

The Internal Revenue Service (IRS) has introduced a new provision allowing individuals to withdraw up to $1,000 from their retirement accounts penalty-free for personal emergencies. Bill Harris, Evergreen Money Founding CEO of and former CEO of Intuit, PayPal, and Personal Capital, joins Wealth! to discuss the implications of this change.

Harris views this move as part of the IRS's broader effort to become more "customer-centric." He notes that this initiative aligns with other recent improvements, such as enhanced telephone support and the introduction of free tax return software.

Harris points out that many individuals are struggling to handle emergencies due to depleted savings and this new retirement law provision aims to provide some relief in such situations. This option is available to anyone with a 401(k) or IRA. However, Harris notes individuals can only take advantage of this penalty-free withdrawal once per year.

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This post was written by Angel Smith

Video Transcript

Need a quick 1000 bucks.

The Internal Revenue Service a K A the IRS making it easier to take some cash from your traditional retirement account penalty free for a personal emergency to discuss what this means for your money.

We've got Bill Harris.

Who's the evergreen founded CEO.

Great to have you here with us, first and foremost.

I mean, just take us into this update from the IRS.

This is this is pretty significant.

Uh, yes, it is, Brad, great to be here.

And, um, this is another of the steps that the IRS is taking in recent years to be a little bit more customer centric.

Um, some of the things they're doing, they're, um, offering some free tax software for very simple returns.

They're trying to do a better job answering the phones.

And in this case, what they're doing is allowing people an easier way to take one up to $1000 out of their, um, retirement account.

If they need it for a personal, uh, emergency.

OK. And so with this now, I mean what like what really prompted this?

Was it pressure on the IRS was the IRS realising that more people needed to be able to tap this for just emergencies like, Well, it's pretty common knowledge in, uh, in the economy right now.

There are many people who are struggling to, uh, to handle emergencies, particularly because they have not much cash on hand.

And, uh, currently, you can in an a hardship or an emergency.

You can, uh, withdraw money from a retirement account with, uh without paying the 10% penalty that you would normally pay, as well as the tax bill that you would normally pay if you take money out.

There are exceptions today, but they require you to specify the exceptions and work directly with, uh, your employer.

This $1000 amount it's now free from an employer's, uh, certification does.

Does everybody qualify for it, or are there certain prerequisites?

Um, just about anybody who has a, uh, retirement account either a 401k or an IRA can, uh, take out this money.

It can only be done once a year.

Um, not all employers actually support the plan at this time.

Uh, and you can only take up, uh, any amount that is over a minimum $1000 balance in your account And does it sound like there are taxes that you would have to at least consider around this type of withdrawal?

Yes.

Um, when you take money out of an out of a retirement account, you a pre-tax retirement account, you owe taxes.

And so, um, you would typically, if you just withdrew the money without a hardship or emergency exemption, you would typically not only owe the taxes that you never paid originally on that amount, that's been, um, that's been invested, but also a 10% penalty.

Now, in this case, if you take the $1000 out, you don't have the $10,000.

Uh, sorry, the 10% penalty.

But you do ultimately need to pay the tax on that $1000 if you don't pay it back within three years.

Understood.

And And Bill, just lastly, while we have you here, I mean, one of the major things that we're kind of trying to track right now, it's just a state of retirement savings.

I mean, if you're taking away from this 1000, of course that's, you know, or taking out this 1000.

Of course, that's 1000 less that you have for later on.

But maybe that that helps you out in the long term.

Because you're also not hitting your your real cash or the real kind of cash flow that you may have to deploy towards that expense.

No, it's very tempting to take the money out, And that's exactly why you should work very hard not to do so.

This is your long term money.

This is your retirement money.

This is what you're funding for the future.

And it's actually a good thing that it is hard to take money out of a retirement plan.

So although you don't have to specify the reason work really hard to use this only when you absolutely need it.

And by the way, the money that you you talk about could be in a bank account.

Well, in bank accounts today, you're earning just about nothing.

All of the majors uh, Wells Fargo chase, uh, Bank of America.

You know what they pay on checking accounts and savings accounts 0.01%.

And by the way, if, uh, in the current 5% interest rate environment.

If all checking accounts, just the checking accounts paid five percent.

The American public would earn an additional $283 million each day.

In their checking accounts, people lose as much money in their in interest in their checking accounts as they are paying in, um, interest on their credit cards.

You know, that's really interesting.

Especially given the amount of fees that we've started to get charged on some of the simple savings accounts right now, Uh, that's a conversation for a different day.

Bill Harris Evergreen Founding CEO Joining us today, Bill, Great to see you.

Thanks a lot.

Thank you.