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"Emergency Fund"

  • mjslife
    Posted: Jul 23, 2009 10:43 AM
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    Houston, TX
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    I live in Houston, Texas and I received a separation package a month ago from my job of 24 years. I'm scheduled to roll my 401k and retirement fund into an IRA with my bank (Chase). You made a comment on 4 steps to losing a paycheck:

    However, if you do not have your emergency fund established, that is a priority and you may need to temporarily reduce your retirement savings until your emergency fund is in place.

    Can you take money out of your 401k and retirement fund to establish a emergency fund? If so, how?


  • #1
    Posted: Jul 27, 2009 08:06 AM
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    Marietta, GA
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    Although an emergency fund is important, I would not generally advise that you take money out of an IRA or 401k to fund it.

    When you take a distribution from your 401k or your IRA, it is considered "ordinary income" by the IRS and taxed as such at your marginal tax rate. The money went into the accounts pre-tax so will be taxed when it comes out. If you are under age 59 1/2 and don't qualify for any of the exceptions, you also will be paying a 10% penalty on the money you withdraw. You are doing the right thing with a direct rollover to avoid tax consequences at this point.

    The purpose of an emergency fund is to have a reserve of money so you are not dipping into other savings or retirement accounts. The most common need for an emergency fund is to cover living expenses in case of loss of employment, but other needs might include major medical expenses, or home or auto repair. If you currently don’t have an emergency fund but still have income, try putting a small amount from each paycheck away each month. Your goal is to eventually accumulate 3 to 6 months of living expenses.

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