You may have run into this situation before, you have an unexpected financial emergency and need access to cash fast. You might have considered taking money out of your traditional IRA or 401(k) but are under the age of 59 ½, meaning the distributions are not only taxable but subject to a 10% penalty tax as well.

Starting in 2024 there will be two new relief options available for taxpayers facing emergencies under the SECURE 2.0 law.

Pension-linked emergency savings accounts

Employees with 401(k), 403(b), and 457(b) plans can elect to offer emergency savings accounts to employees who are considered non-highly compensated. For 2024, non-highly compensated is an employee who earned less than $150,000 in 2023. More details regarding these accounts are detailed below:

• Contributions are limited to $2,500 (plan sponsor may determine them lower)
• The accounts can’t have a minimum contribution or account balance requirement
• Employers can offer eligible participants to enroll in the accounts beginning in 2024
• Participants can withdraw once per calendar month; withdrawals must be made “as soon as practicable”
• For the first four withdrawals in a plan year, participants can’t be subject to any fees or charges. While subsequent withdrawals may be subject to fees or charges.
• Contributions must be held in cash, interest-bearing deposit accounts, or an investment product.
• If an employee moves from being not highly compensated to highly compensated and has an employee emergency savings account, no further contributions can be made but retains the right to withdraw the balance.
• Contributions are made on a Roth basis meaning they are included in the employee’s taxable income but won’t have to pay taxes when a withdrawal is made.

Penalty-free withdrawal for emergency expenses

This provision is another way to get money for emergencies. SECURE 2.0 adds a new exception for distributions sued for emergency expenses, which are defined as “unforeseeable or immediate financial needs relating to personal or family” emergencies.

Only one withdrawal of up to $1,000 is permitted per year. The taxpayer has the option to repay the distribution within three years. This provision is applicable for distributions made beginning in 2024.

The information above outlines the basics of these provisions. Additional guidance will be available once issued by the IRS.