Where to turn before raiding your 401(k)

When you are in a tight spot for money and you have a sizable balance in your retirement account that won’t be needed for years to come, it can be tempting to go ahead and tap into it. You can just restock it later, right? The problem: this does not always end up happening. Plus, you will lose out on the compound interest that would have accrued, which can materially affect your available savings come retirement.

Last year, a “record 6% of workers in 401(k) plans administered by Vanguard Group took a hardship withdrawal,” marking the “sixth straight year of increases since 2018, when Congress made it easier to take a hardship distribution,” said The Wall Street Journal. Many people are facing real financial challenges: The “top reasons for taking hardship withdrawals last year were avoiding foreclosure and eviction and paying medical expenses.” But when you are in this situation, there are other places to turn outside of the money set aside for your golden years.

Your emergency fund

If you have built up an emergency savings fund, this is the time to use it, as opposed to raiding your 401(k) balance. This is “why you have emergency savings in the first place,” said Bankrate. Just make sure that if you do tap into it, you replenish the balance later, and that you are saving in a high-yield account to maximize interest earnings.

Friends or family

If you have friends or family members who might be willing to help, share your situation with them. “Though it can be difficult to ask, borrowing from someone you know could be a fast and affordable solution,” as you will avoid a credit check and, depending on the situation, interest payments, said NerdWallet. Just make sure to approach the arrangement thoughtfully, with clear communication and an agreed-upon repayment plan, to avoid future conflict.

A home equity loan or line of credit

If you own a home and have built up equity in it, a home financing product — like a home equity loan or a home equity line of credit (HELOC) — can “provide a cost-effective method of accessing extra cash,” said SoFi. Interest rates on these loan products are typically lower because they are secured loans, meaning they are backed by your home. However, this also means that in case of non-payment, the lender can seize your house, which is a risk worth keeping in mind before proceeding.

A personal loan

Another option you might consider, if you do not have a home to borrow against or do not want to put it on the line as collateral, is a personal loan. Personal loans are “available from online lenders, local banks and credit unions and can be used for virtually any purpose,” said SoFi. These loans are also unsecured, which means you do not have to put anything on the line to take one out — though that can also mean they may have slightly higher interest rates.