The past several months have brought a nasty triple whammy to many American families: home equity disappearing, big stock market losses, and then a layoff. Ouch.

If you're in this situation, or worried that you might be soon, I sympathize. Finding oneself pushed from secure comfort to the financial margin in such a short time is a recipe for all kinds of stress. Suddenly, all of the cushions and reserves and backup plans you've had for years seem much more tenuous. Nothing focuses the mind on money so much as the possibility of not having enough to meet basic needs -- and that focus drives stress levels into the stratosphere.

Of course, when people are stressed, prudent long-term planning often gets thrown out the window in favor of solutions that solve today's urgent problems right now. And if the bank accounts are empty and the brokerage account is in tatters and the folks at the bank look at you like you're from outer space when you ask about a HELOC, your eyes are going to start casting around, looking for something to stop the panic from rising.

Sooner or later, they'll fall on your retirement account balances. Danger, Will Robinson!

I'm not going to say that you should never go there. Sometimes you gotta do what you gotta do. But if and when you find yourself considering a raid on your retirement funds, stop, take a deep breath, and think before you proceed. You might save yourself some big headaches down the road.

The cost of unlocking the box
First, let's get this out of the way: Tapping retirement accounts should be very close to your last resort, just this side of foreclosure or bankruptcy. (In fact, you might want to think about bankruptcy first -- your 401(k) and IRA balances up to $1 million are usually exempt from any bankruptcy claims, and getting out from under debt might be a better move than blowing your retirement.) That money is your future, and odds are it will increase substantially over just the next few years as the stock market starts to recover.

When you consider the taxes and penalties, it's a grim picture: If you take a $10,000 withdrawal today, you'll end up with around $6,500 after taxes and that 10% early withdrawal penalty. Leave it invested for 20 years instead, and if the next 20 years looks anything like the last, your returns could look like these:


Initial Investment on 12/19/1988

Current Value

ExxonMobil (NYSE:XOM)



Southern Co. (NYSE:SO)



Johnson & Johnson (NYSE:JNJ)



Walt Disney (NYSE:DIS)



Hewlett-Packard (NYSE:HPQ)



Microsoft (NASDAQ:MSFT)



Procter & Gamble (NYSE:PG)



Any mutual fund returning 8% a year



You see what I mean. $6,500 now versus any of those totals in 20 years is a gut-wrenching choice. But sometimes you've got to do it anyway.

How to get the money
If you're in genuinely dire straits, there are a number of ways to tap your retirement savings. Follow the links to learn a lot more about each:

  • An IRA "loan." While you can't take a loan as such from your IRA, you can do something called a "60-day rollover" that lets you have temporary access to the money. Briefly, IRS rules allow you to move money from one IRA account to another once every 12 months -- with a 60-day grace period permitted between the withdrawal and the deposit in the new account. If you're really sure you'll be able to repay (whether directly or by securing other financing) within 60 days and the need is urgent, this could be an option. Learn much more here.
  • IRA distributions. Under very specific circumstances, you can take IRA distributions before age 59 1/2 without paying the 10% tax penalty. (You'll generally still have to pay income tax, with a few exceptions.) You can also withdraw your contributions -- but not any earnings on those contributions -- from a Roth IRA at any time without taxes or penalty. Learn more here and here.
  • 401(k) loans. If you or your spouse is employed, taking a loan from your current 401(k) may be an option. There are lots of reasons not to take a 401(k) loan, but most of them go out the window in times of genuine hardship. If the need is fairly urgent, this may be your best option. Learn more here.
  • 401(k) hardship withdrawal. 401(k) plans don't generally allow for withdrawals, but they can choose to allow for "hardship withdrawals" if certain conditions are met. Those vary from plan to plan, but this doesn't: You'll be paying income taxes and that extra 10% penalty on any withdrawal. A hardship withdrawal is a big, serious deal -- it's not something to do because you're afraid of stock market losses, or to upgrade your car. Rather, it's a last resort when you've been hit by a huge expense, you're afraid of not being able to feed the kids, and you've exhausted your other options. Learn more here, and talk to your benefits department to learn about your plan's specific requirements.

To read more about dealing with a financial crunch:

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Fool contributor John Rosevear has no position in the companies mentioned. Southern Company and Johnson & Johnson are Motley Fool Income Investor recommendations. Microsoft and Walt Disney are Motley Fool Inside Value picks. Walt Disney is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.