Is Your IRA an Emergency Fund? Possibly—but Don't Touch It If You Don't Have To
by , CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
November 4, 2009
I was laid off and am seeking employment. I am 60. Would you advise using my IRA funds in an emergency if my unemployment benefits end? What would the penalties be for doing so?
The technical part of this question is easy to answer: There are no penalties for withdrawing money from your IRA once you've reached the age of 59 ½. (Note to those younger than age 59 ½: If you withdraw IRA funds early, you'll likely face a 10 percent penalty in addition to the income tax on the amount of your withdrawal. There are some exceptions—for example, if you're disabled or have extremely high medical expenses—but early withdrawals are typically penalized.) So at age 60, you can take as much money as you like out of your IRA, though of course withdrawals will be taxed as ordinary income. And if it's truly an emergency—if you need that money to survive—by all means do so.
Nonetheless, I advise you to think about your IRA assets as a last resort. After all, our IRA is designed to help you retire comfortably. At age 60, assuming you're in good health, you may be need money from that IRA for another 30 years. So the longer you can postpone tapping that asset, the better.
Accordingly, I would use up any existing taxable account assets you have—like traditional brokerage accounts or mutual fund accounts outside your IRA—before starting to make withdrawals from your IRA. If you have investment gains, you'll owe taxes as you realize them, but they may be subject to preferential long-term capital gains tax treatment.
But let's say all your investment assets are in your IRA and that you will need some cash when your unemployment benefits stop. First, cut all unnecessary expenses. Second, consider taking part-time work or looking for an alternative job to help tide you over until you find a new job in your chosen field. The goal, obviously, is to minimize how much you withdraw from your IRA.
And when you do make withdrawals, keep them to the minimum. You don't need to take a year's worth of money out at once. The goal should be to keep as much housed in your IRA as possible, to minimize your tax burden and to maximize your potential for future tax-deferred gains. (For example, if you had to make a withdrawal between now and the end of the year, take out just enough to cover this year's living expenses. That will reduce your tax liabilities next April.)
Remember, too, that you'll be eligible for Social Security in just two years when you reach age 62. The traditional advice is to postpone taking Social Security as long as possible so that you can benefit from a considerably higher monthly benefit. In fact, your benefits will increase until you reach the age of 70, after which it no longer makes sense to delay. However, if you have trouble finding work, and you have no other assets, you'll almost certainly want to begin taking Social Security benefits when you turn 62—which will reduce the need to withdraw money from your IRA.
By the way, now's a good time to look at the structure of your IRA portfolio. A proper answer is beyond the scope of this column, but you should speak with a retirement investment professional to help ensure your IRA can provide some potential for growth and help you meet your current living expenses. (In fact, that's good advice for anyone nearing retirement: What does your portfolio look like and how does it match up with your needs over the near term and over the course of your retirement?)
Bottom line? At age 60 you won’t have to pay a penalty for withdrawing funds from your IRA. (You will, however, have to pay income taxes at your ordinary rate.) But think of your IRA as a last resort. You'll want it to last as long as your retirement does. Good luck.
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