Penalty-Free 401(k) Use Proposal Joins Stream of Industry Offers

New bipartisan legislation that would allow retirement savers to tap their 401(k)s penalty-free for emergency expenses could disrupt an emerging private-sector market already divided on similar “sidecar” savings products.

The Enhancing Emergency and Retirement Savings Act of 2021 introduced earlier this month would modify the federal tax code so workers could withdraw vested amounts of up to $1,000 a year to cover short-term emergency costs without facing steep IRS tax penalties for early distributions.

Some say the proposal from Sens. James Lankford (R-Okla.) and Michael Bennet (D-Colo.) would shore up emergency savings among low- and moderate-income workers. Nearly four in ...