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Retirement Planning > Saving for Retirement > 401(k) Plans

Bill Would Allow Penalty-Free Withdrawals from 401(k)s, IRAs

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What You Need to Know

  • The distribution would be limited to vested amounts over $1,000, with annual maximum withdrawal of $1,000.
  • The individual must replenish the withdrawn amount before an additional emergency distribution could be made.
  • Several financial services firms and adovcacy groups support the bill.

Sen. James Lankford, R-Okla., introduced legislation Tuesday that would allow retirement plan participants to dip into their savings for emergencies.

The Enhancing Emergency and Retirement Savings Act of 2021 would “encourage participation in retirement plans” by giving individuals penalty-free access to funds should a family emergency hit, Lankford said in introducing the bill alongside Sen. Michael Bennet, D-Colo., both members of the Senate Finance Committee.

The bill would provide a penalty-free “emergency distribution” option from employer-sponsored retirement accounts and IRAs.

One emergency distribution would be permitted per calendar year, and that distribution would be limited to vested amounts over $1,000, with an annual maximum withdrawal of $1,000, according to the bill.

The bill also “requires that the individual replenish the withdrawn amount back to the plan before an additional emergency distribution from that same plan is allowed. Together, this will provide flexibility while also ensuring that individuals continue to save for retirement.”

The bill is backed by the American Retirement Association, Nationwide Retirement Solutions, LPL Financial, State Street Global Advisors, the American Benefits Council and the ERISA Industry Committee (ERIC).

Brian Graff, ARA’s executive director and CEO, said in a statement that the bill “smartly leverages the existing workplace-based retirement plan system to address this emergency savings problem while ensuring Americans continue to save for a secure retirement following an emergency.”

It also “creates a new category of distribution in a 401(k) or similar plan that would allow workers who have a certain balance in these accounts to quickly access their savings to address a personal financial emergency without an additional tax penalty and a minimal amount of paperwork,” Graff said.

Bennet added that “I hear all the time from Coloradans who get hit with an unexpected car repair they can’t afford and then lose their job because they can’t make it to work. Millions of families are trapped in this cycle of economic insecurity — one emergency away from everything falling apart.”


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