A retirement expert advises against making a habit of withdrawing $1,000 from retirement savings penalty-free.

According to Bankrate's 2024 emergency savings report, most Americans lack the funds to cover an unexpected $1,000 expense using their own savings.

A new rule has made it easier to withdraw up to $1,000 from a retirement investment account without tax penalties for unexpected emergency expenses.

If you're not careful, using this option too much may derail your long-term retirement planning strategy.

Using it shouldn't make you feel ashamed because everyone experiences difficulties in life, advises Anne Lester, a retirement expert and author of 'Your Best Financial Life: Save Smart Now for the Future You Want.' However, she cautions against overusing it.

Withdrawing money from retirement savings before the age of 59½ may result in a 10% penalty.

According to the Secure 2.0 Act, you can withdraw $1,000 from your 401(k), traditional IRA, or other qualified tax-advantaged retirement account without penalty for unforeseeable or immediate financial needs, such as personal or family emergency expenses, as of the start of this year.

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However, there are a few caveats to be aware of.

If you withdraw $1,000 from your retirement account, you must replace it in full or through regular deposits within three years or you won't be able to make another $1,000 withdrawal during that repayment period. Additionally, you'll need to pay income tax on your withdrawal.

You must self-certify in writing with your retirement plan administrator that you require the funds for an emergency.

"Lester clarifies that the purpose of the trip is not to avoid feeling left out or missing out on an opportunity with friends, but rather to address an emergency situation such as a spouse losing their job or an urgent medical bill."

Keeping your retirement savings on track

While it may be more advantageous to withdraw from your retirement savings to cover a one-time, unexpected expense like a costly car repair rather than accruing high-interest credit card debt, it's still important to exercise caution when doing so, advises Lester.

"Repeating the action without repayment can derail your retirement savings, according to her."

Frequently withdrawing money from your retirement account without repaying it can hinder the growth of your savings through compound interest, potentially leaving you with insufficient funds when you retire.

To avoid dipping into your retirement savings for unexpected expenses, it's crucial to establish an emergency fund to provide a financial safety net.

"Lester advises that while it may not be terrible to withdraw money from retirement savings if it's necessary and you don't have it, your ultimate goal should be to repay the money and focus on building up your emergency savings to prevent future financial difficulties."

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