If you wanted to make a big purchase, or were faced with a major home or auto repair, would you have the money readily available?
If not, you might be tempted to look at your 401(k) or IRA. But this may not be a good idea.
In the first place, these early withdrawals can disrupt the benefits of compounding, which will likely result in you having a lower portfolio value in the future.
But there’s another issue, too: Taking money from your traditional IRA and 401(k) before you’re 59½ can result in taxes and penalties.
As an alternative to taking withdrawals from a 401(k), you could take out a 401(k) loan.
You wouldn’t be taxed on the money, and you’d pay yourself back with interest.
However, if you left your job early, you’d likely have to repay the money quickly.
You could also consider setting up an emergency fund containing at least six months’ worth of living expenses, with the money kept in a liquid, low-risk account.
Try to explore all your options before tapping into your IRA or 401(k).
Keeping these accounts intact can help you build the retirement income you’ll eventually need.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor John Dickerson. Member SIPC.
