Typically, an early withdrawal from a tax-advantaged retirement account is not only taxed at the saver’s ordinary rate, but also faces a 10% penalty. Before this year, there were a number of limited circumstances—including birth or adoption and for first-time homebuyers—in which someone could withdraw funds from their pre-tax retirement account before age 59½. (Savers can always withdraw contributions to a post-tax Roth IRA with no penalty.)

Those rules were eased this year. Since January, penalty-free withdrawals of up to $1,000 have been allowed for personal emergencies, under the SECURE Act 2.0, which made other significant changes to retirement plans. An emergency expense in this case is not defined under the law; it can include funds to pay for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” The law also created new exceptions for disaster relief, those with a terminal illness, and domestic abuse survivors.

In the past, withdrawing the money might have been a time-consuming task involving plenty of paperwork, but the new rules for personal emergencies speed up the process. Savers will still need to pay income tax on the withdrawal if they don’t pay it back, as they contributed to a 401(k) and traditional IRA pre-tax. In the case of a 401(k), they do need to self-certify with their employer that the withdrawal is for an emergency.

The change comes as an increasing number of Americans are making hardship withdrawals from their retirement accounts. According to Vanguard, a record 3.6% of the 5 million accounts it administers saw an early withdrawal in 2023, up from 2.8% the year before.

There are a few catches: Not all employers have opted into the change, meaning you might not be able to tap into your 401(k). It can only be done once a year at most. And you can’t withdraw so much that you leave your account balance below $1,000.

You have three years to repay the money, though you don’t have to. That said, during those three years, no other emergency distributions can be taken out of the account unless the money is repaid or new contributions are made that are at least equal to the withdrawal.

Be careful with early withdrawals

While the change could be helpful to many people struggling to pay bills or dealing with an emergency—and is a better option than running up credit card debt or taking out a payday loan—savers should avoid treating their retirement account like an ATM, to the best of their ability.

After all, retirement accounts are the bulk of many households’ total savings. While $1,000 may not seem like much to spend now, it means losing an untold amount in future compounding returns.

Additionally, not repaying the distribution will also change a saver’s tax situation, which they should understand before they go through with it. Most financial advisors agree that a hardship withdrawal should be a last resort.