To keep from dipping into long-term investments or borrowing at unattractive rates when you need cash in a hurry, create an emergency savings fund that can cover at least three months of essential living expenses such as rent or mortgage, utilities, food, and transportation.
|Withdraw 401(k) money before you’re eligible||Pay early withdrawal penalties (10% or more)|
|Live off credit cards||Pay 13% interest or more|
|Postpone monthly payments||Pay late penalties, damage credit rating|
|Sell stocks or mutual funds||Lose money if it’s a bad time in the market|
Can I borrow from my 401(k)?
Schwab’s response would generally be “No!” Your retirement account is a crucial component of your long-term financial plan. However, in an emergency, and with a lot of caveats, it can make sense. If you understand and follow the stringent rules for 401(k) borrowing and you are extremely confident you can pay the money back in a timely fashion, this might be a choice to consider. But beware; think carefully before you leap.
Understand the terms.
You’ll also need to understand the procedures for paying the money back; generally, you do so through an automatic payroll deduction. Of course, you’ll be paying the interest to yourself, which is a good thing.
Understand the risks.
These are very real risks, so before you embark on this path, make sure you understand them. The last one is particularly important: If you think there’s any chance of losing your job, the consequences could be disastrous.
What about a 60-day emergency loan from an IRA?
Unlike a 401(k), an IRA doesn’t have a loan provision, but you can access money from your IRA for a 60-day period with what is considered a tax-free rollover. This essentially means you can withdraw money from your IRA tax- and penalty-free as long as you put it back into the same or a different IRA within 60 days.
As you can see, while on the surface a tax-free rollover may seem like an easy way to cover your short-term cash needs, it can get complicated—and costly—if you lose track of time.