Facing a financial emergency can be stressful, and it might seem tempting to withdraw money from your retirement savings. However, taking money out of your retirement account before you reach age 59½ usually means you’ll pay a 10% penalty—plus regular taxes on the amount you take out.
Many people still withdraw from their retirement funds early. According to a survey, almost 40% of employees have done this, often to pay for emergencies like car or home repairs, debt, or everyday expenses that have gone up.
But before tapping into your future nest egg, consider these five alternatives:
1. Check Your Employer’s Benefits
Your workplace may offer some benefits that could help you save money or give you extra cash in an emergency. Look into things like:
- Pre-tax commuter benefits
- Wellness stipends
- Work-from-home reimbursements
- Technology allowances
- Hardship grants
- Employee assistance programs
- Pay advances
These programs may not seem like much at first, but together, they can help lower your expenses or provide some financial relief.
2. Find Creative Ways to Get Extra Cash
If your paycheck isn’t quite enough, consider ways to bring in some extra money. You don’t need a second full-time job—think about using your skills for freelancing work like writing, tutoring, or graphic design.
You could also sell items you no longer use, such as electronics, clothes, or household appliances, on websites like Facebook Marketplace or eBay. Even spending a few hours cleaning out and selling things can provide needed funds fast.
3. Reduce or Pause Your Retirement Contributions
If you’re still putting money into your retirement plan, it might help to lower your contributions or pause them for a while.
This method can free up money for immediate needs without taking away from your retirement account. Redirect what you save into an accessible emergency fund.
4. Build an Emergency Fund
An emergency fund is a savings account meant just for unexpected expenses. Even if you can only save a small amount each month, it adds up and can help you avoid taking money from your retirement.
Experts recommend saving at least three to six months’ worth of living expenses, but any amount helps.
5. Explore Penalty-Free Withdrawal or Loan Options
If you absolutely must use your retirement savings, see if you qualify for a penalty-free withdrawal or a retirement account loan.- Hardship Withdrawals: If you have an “immediate and heavy financial need,” like big medical bills, certain home repairs, tuition, or to avoid eviction, you may qualify. Remember, you’ll still pay income taxes on the money.
- Retirement Account Loans: Many retirement plans allow you to borrow from your savings and pay it back (usually with interest) within five years. You won’t owe extra taxes as long as you repay the loan.
In Summary
Before touching your retirement savings, check for other ways to handle your expenses. Use your employer’s benefits, find ways to earn extra money, cut back on contributions, build an emergency fund, or look into penalty-free withdrawals or loans.
These steps can help protect your retirement funds so they’re there when you need them later in life.
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