Financial emergencies aren't just stressful. They can be genuinely destabilizing if you don't have emergency savings to cover the expense. When you need money quickly, tapping your retirement savings can feel like your only option.
The problem with that is that you'll set your retirement plan back, and you'll probably pay an early withdrawal penalty to the IRS, too. So before you go that route, it's worth exploring the following three ways to get the cash you need.
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1. Delay the expense, if possible
If you don't need to make the payment right now, don't. Give yourself some time to save up for it over the next few months. Defer a little from each paycheck for the expense. Even if you don't manage to save the full amount, you'll minimize how much you have to take from retirement savings.
If you owe a creditor, reach out to see if you can set up a payment plan. This might enable you to spread your payments over several months or years so you don't have to pay a lump sum right away.
2. Consider taking out a loan
Borrowing money means taking on additional debt and adding another monthly payment to your budget. But it enables your retirement savings to remain invested and growing. It'll also help you avoid the 10% early withdrawal penalty you'll typically face for taking money out of retirement accounts under age 59 1/2.
The type of loan that works best for you depends on what you need the money for. A personal loan is a good all-purpose choice. You can use these loans for just about anything, and they don't require you to put down any collateral. However, that also means interest rates on these loans are higher than on some other types of loans.
Make sure you thoroughly understand the loan terms before you agree to them. Know how much you'll have to pay per month and how much you'll pay overall. Don't forget to factor in closing costs.
3. Consider a 401(k) loan if you have to tap retirement savings
Not all 401(k)s offer loans, but if yours does, this could be a better alternative than an early retirement account withdrawal. This lets you borrow up to the lesser of $50,000 or 50% of your vested account balance. If 50% of your vested account balance is less than $10,000, you may be able to borrow up to $10,000.
You must pay this back over time with interest. But that interest goes into your retirement savings rather than into a creditor's pocket. This can minimize the toll the 401(k) loan takes on your retirement savings. However, you may face penalties and taxes if you fail to repay the loan as scheduled.
It's worth comparing all your options to see which one(s) make the most sense for you. If you can avoid or even reduce how much you withdraw from retirement savings, you'll be much better off.
