Think Before Tapping 401(k)s and IRAs as Emergency Fund
All Americans are now allowed to withdraw up to $1,000 every year from retirement accounts to pay for a broad range of emergency expenses.
There are several reasons, however, why you should avoid tapping your retirement accounts at all costs.
Reasons to leave retirement funds alone
You’re diluting your retirement savings. Although the money comes in handy now, you’re chipping away at your nest egg and forfeiting growth. For example, if you withdraw $100,000 that would earn 6% annually tax-deferred for ten years, you give up a whopping $79,000 in lost earnings!
It may be bad timing. Experts say it's difficult to time the markets in the current volatile environment. If you sell some holdings right now, you may be locking in losses that would miss future appreciation.
You still owe income tax. Even if it's for an emergency, income tax is due on all withdrawals from traditional 401(k)s and IRAs.
You may also owe a penalty. You may have to pay a 10% penalty on your withdrawal if it doesn't qualify for an IRS-defined exception.
Ideas to find cash
Instead of tapping into retirement funds, here are some ideas to generate the cash you need:
Sell unwanted items. Take a look around your home for items that you no longer use such as clothes, electronics, or furniture, and sell them through an online marketplace.
Rent out a room or other property. If you have extra space in your home, consider renting it out or finding a more long-term tenant. Be sure to check with your local government for rules on short-term rentals.
Freelance or gig work. Many companies are looking for part-time workers and independent contractors instead of committing to a full-time employee. Consider reaching out to local businesses to offer your expertise, in addition to creating an online profile through platforms that are popular for consultants.
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