I Lost My Job – Should I Withdraw from My 401K or IRA to Prepare for the Worst?

A Reddit user has lost his job, and he’s not sure what to do. While he has some money in savings, he’s trying to decide whether he should prepare to potentially take money from his 401(k) or from his IRA in order to cover his expenses if he isn’t able to find another job quickly enough.

So, are these good options for him, or what can the Redditor do instead?

What to do about your expenses if you lose your job

Taking money out of a 401(k) or out of an IRA is usually not a very good option. But, the good news is, many Reddit commenters came up with other suggestions for the original poster (OP) so he does not have to raid his savings. Specifically, other posters advised that he:

• File for unemployment benefits, which should replace part of his wages
• Do some part-time work or gig work, although he needs to be careful not to earn so much that he loses his unemployment benefits 
• Have his wife go back to work and earn as much as possible (the OP said she doesn’t work right now and can’t work full time due to mental health issues, but that she may be able to earn some money) 
• Cut expenses as much as possible by taking steps like clipping coupons 
• Look into whether he qualifies for government benefits, such as SNAP benefits, to help make his money last

The poster here has said he has around $2,574 in essential expenses per month, including costs like his mortgage, gas, and utilities.  He has $15,500 in savings as well as $4,000 in stocks, but once that is gone, he would be left tapping into his $135,000 IRA or $55,000 in 401(k) funds to make ends meet. 

By taking the above-mentioned steps, hopefully, the poster can make that emergency savings last until he finds another job. He should also start networking as aggressively as he can, should freshen up his resume, and should make job-hunting his new full-time job until he can find a new position. 

Tapping into retirement savings should always be a last resort

The Redditor and others who lose their job should always make sure to exhaust all of their options before raiding their retirement savings during a financial crisis. For example, other posters even suggested looking into a home equity loan or line of credit before tapping retirement savings. 

It’s important to do everything possible to avoid taking money out of retirement accounts, as doing so can come with penalties and can seriously jeopardize your future financial security. That’s because you will not only lose the money you withdraw but will also lose any returns that the funds would have earned over time. 

If you do have to take money out of these plans, a 401(k) loan is usually a better bet than withdrawing money from either a 401(k) or an IRA. If your plan allows it, taking out a loan enables you to avoid penalties and eventually put the money back so you won’t lose compound interest over the rest of your career.  Even this should be avoided unless you have absolutely no choice — but a loan is a better choice than taking money out altogether.

Talking with a financial advisor can also be a good idea in these situations, as an advisor can help you identify cuts to make, can help you create a financial plan for during and after your layoff period, and can assist you in making sure you fully understand the decisions you’re making if you must access your retirement assets. 

Hopefully, this Redditor will be back to work before accessing his retirement funds becomes necessary, but if that’s not the case, then the poster will need to think carefully about how to make the best choices to protect his financial security both now and in the future. 

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