Should I Tap My IRA if a Recession Hits?

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  • Many financial experts are worried about a potential recession.
  • It's important to have cash reserves on hand during a downturn -- but that doesn't necessarily mean raiding your IRA.

It's a move that could have serious consequences.

Is a recession right around the corner? Some experts insist that's where the economy is headed.

The Federal Reserve has been aggressively raising interest rates in an effort to slow the pace of inflation. The logic is that if borrowing becomes more expensive, consumers will start to spend less, thereby driving down the cost of goods.

But if consumers stop spending to a large degree, it could fuel a recession. And that could lead to an extended period of layoffs and financial upheaval.

One of the best things you can do to prepare for a recession is to boost your savings. That way, if you lose your job, you'll have cash reserves to fall back on.

But is tapping your IRA during a recession a reasonable course of action to take? Here's why it's really not your best bet -- at all.

The dangers of raiding an IRA

The purpose of funding an IRA is to have money to pay your bills in retirement, once you're no longer working (or no longer working to the same degree). If you raid your IRA before retirement, you'll have that much less money to spend later in life.

That's one reason to leave your retirement savings alone during a recession. The other is that if you take an IRA withdrawal prior to age 59.5, you'll face a 10% penalty on the sum you remove. So if a need for money arises and you take $5,000 out of your IRA, you'll automatically lose $500 of that off the bat if you're too young to take withdrawals penalty-free.

A better solution

It's easy to see why raiding your IRA during a recession might be tempting. After all, that's your money, and it's not money you need to use anytime soon -- so why not access it to get through a tough financial spell?

But tapping an IRA prematurely can have serious consequences, so a better bet is to do what you can to boost your savings account balance. That's the money you should plan to tap if you lose your job and can't pay your bills on unemployment benefits alone.

Be prepared

While there is a chance the U.S. economy will take a turn for the worse later this year or at some point in 2023, the good news is that we're not there yet. So if you're still working, take the opportunity to add to your emergency fund while your paycheck is still coming in. You may even want to consider getting yourself a side job if the income from your main job is needed to cover all of your bills, and you're not really able to save much of it.

Some recessions can be mild and short-lived, while others can be extended and more damaging. It's hard to say what our next recession will look like, so your best bet is to do what you can to gear up for it -- without raiding your retirement nest egg in the process.

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