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How to Tap Your Roth IRA for Funds When a Pandemic Affects Your Income

How to Tap Your Roth IRA for Funds When a Pandemic Affects Your Income

If you have raised all the cash, you possibly can tap your savings, personal loans, and credit card loans, and need a new source of money to live on, tapping your Roth IRA retirement account is an alternative if you have invested in such an account.

When a pandemic spreads, it puts many people out of work and forces them to consider depleting their retirement accounts to survive day-to-day.

Pandemics can cause the financial markets to plunge, however. If you need to sell your stocks for money to live on because you’ve been laid off, your business has shut down, or because you’ve just entered retirement, the fluctuations of the stock market can be alarming.

Table of contents

Tapping your Roth IRA for emergency funds

If you need to withdraw money from your Roth IRA before you reach retirement age, the move comes with no taxes or penalties.

It is one of the most significant benefits of choosing a Roth IRA for your retirement savings over a traditional IRA. You will need to have owned your Roth IRA account for at least five years, however.

Begin by withdrawing any cash first: A certain amount of money in your Roth IRA is likely to be invested in a low-return money market account.

It tends to come with unimpressive returns but is safe from any risk of loss of value during a market crash. Withdrawing the cash in your Roth IRA account first gives your stock market investments time to regain value.

Withdraw money in low-volatility assets: Once you exhaust the money in your money market account, it’s time to turn to your bond and bond fund investments.

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Since bonds tend to be more resistant to market fluctuations than stocks, they are likely to have retained most of their value.

Low-interest rates cause bond prices to appreciate. There is a chance, then, that your bonds have seen gains.

When you need cash, you should consider selling your bonds or bond funds a little at a time. By spacing your selling activities out, you maximize your chances of selling as much as possible when the prices are higher.

You also allow your bonds to stay in your account for as long as possible and earn you cash.

When you plan to sell a bond fund, it can help pick one that hasn’t shown much movement in a while. Doing this can help you convert to cash assets that have the lowest potential of rising soon.

Liquidate stocks with low potential: You should turn last of all to your stocks and stock-based funds. How do you know which ones you should cash in first, however?

It can help to choose stocks that have limited potential to appreciate. Stocks that are closest to full value are likely to the best ones to sell off in an emergency.

If you have stocks or mutual fund investments that generate dividends for you, it will make sense not to sell them.

Dividend stocks tend to be subject to more significant market fluctuations than bonds, but they earn you an income. When stock prices go down, their dividend yields tend to be much greater than before.

However, when corporate earnings fall, these companies may have no choice but to lower their dividends, causing their stocks to fall even further.

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Just as with bonds, you should sell your stocks a little at a time. This way, you’ll give your stocks the greatest time possible to recover in value.

Selling a little at a time isn’t a bad idea because trading commissions at online brokers have fallen to zero.


What do you do if you don’t believe that your stocks will regain value?

Before you decide to sell your stocks, it can help to take a pause and think about your decision.

If you have a portfolio of high-quality stocks, such as ones that appear on the S&P 500 index, and you won’t need the money for a few years, you should consider keeping your investments in place and even buying more stocks if you possibly can.

The S&P 500 has a track record of delivering average annual returns at 10 percent for investors who hold on to them.

If you need to sell, you need to stay away from touching the high-quality stocks and go with the ones performing the most poorly.

Even in times, the markets are steady and dependable; it can take considerable planning and organization to live off your investments.

When you need to tap your investments during the panic of a pandemic, however, you need to make difficult decisions. The tips here are likely to be helpful.

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