It can happen to anyone. You have an unexpected expense, you find “the deal of a life time” or you might even lose your job. The bottom line is you need cash and you need it now. Where do you turn? Should you consider exhausting your long-term goals with your short term needs? The simple answer is no and here’s why.
Although you may be able to take “hardship” withdraws from your retirement plan with certain IRS-approved hardship situations, such as medical bills, they come at a high cost. You’ll owe income tax on any pretax money you withdraw in addition to federal penalties and possibly state penalties if you are under 59 1/2.
Some plans may even allow you to borrow money and although it may be at a lower interest rate than a credit card, it could also trigger fees and you may be required to pay back the full amount if you left your job.
The solution is to plan in advance and ensure you have an emergency fund for these situations. The best options are to have a savings account that contains 3 to 6 months of living expenses or if you own a home set up access to a Home Equity Line of Credit. If you haven’t planned in advance for those two options, a zero balance credit card you keep on hand that has a $3,000 to $5,000 limit is good to use for emergencies. With this, you may pay interest but you won’t need to consider tapping your retirement fund and paying the tax and penalties. Best yet, you avoid the pitfall of spending your future prematurely.
If you haven’t planned in advance, it still makes sense to borrow money from friends or family to cover your emergency. You can let them know you have retirement funds should your emergency make it impossible to make payments in a timely manner. The important thing is make raiding the retirement fund the last option you consider and you will be glad you did in the years to come.