Liquid assets are cash-on-hand, investment holdings or any tangible property that can be instantly converted to cash without losing value. Individual retirement accounts, or IRAs, and 401(k)s are retirement savings accounts designed to hold your money until retirement and technically are not liquid assets, unless you have reached retirement age. The idea is to leave your money in the 401(k) or IRA until you retire, so liquidating these funds prior to retirement age will get you some cash, but also some Internal Revenue Service penalties that reduce the value of your asset.
Examples of liquid assets include cash, checking and savings accounts, certificates of deposit – anything that you can withdraw from or sell at a breakeven point or profit to get cash in your hands. Arguably, even if you sell something and take a loss, you still get cash in your hands, but you’ve lost money on your asset, so it is not considered liquid.
Liquidity and Retirement Plans
Your 401(k) and IRA plans can be considered liquid once you’ve reached qualifying retirement age, because you can withdraw as much cash as you want out of them without facing IRS early withdrawal penalties. The IRS considers 59 1/2 the minimum retirement age and will not assess a 10 percent early withdrawal penalty should you liquidate your 401(k) or IRA plan. You will be assessed income tax, however, if you funded the plans with pretax dollars.
There are exceptions to what the IRS dubs the “Age 59 1/2 Rule.” If you are 55 or older and liquidate your 401(k) proceeds because you are leaving your job, you will not be assessed a 10 percent early withdrawal penalty. You may also withdraw monies out of your 401(k) for an unexpected financial hardship. This is a loan, however, and the monies are usually paid back into your 401(k) via payroll deduction, so you are not, technically, liquidating your asset. Qualifying hardships include money to prevent eviction or foreclosure, emergency funds for a damaged home, funeral expenses, medical care, higher-education costs and, although not necessarily a hardship, money to purchase your first home.
IRA Exceptions are a little trickier, because you do not have to pay back the monies you take from your IRA. You can liquidate funds from your IRA for medical expenses, but they must exceed 10% of your annual adjusted gross income. If you were born before January 2nd, 1952, they need only exceed 7.5%. You may also use IRA funds for education expenses, to purchase your first home or if you become disabled. If you lose your job, you can pay for your health insurance with your IRA. If you get into tax trouble and the IRS levies your IRA, it can liquidate the IRA to pay your tax lien. If you are a military member and are called into active duty, you may pull from your IRA for qualifying expenses.
Roth 401(k)s and IRAs are more “liquid,” by nature, than traditional plans. Roth plans are funded with after-tax dollars; therefore, you may take out your contributions at any time no matter what your age without facing taxes or IRS penalties. Roth earnings, however, are not liquid. You cannot pull out your Roth 401(k) or IRA earnings until you reach age 59 1/2 and have had your Roth account opened for five years or longer.
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