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If coronavirus has cut your income, here’s how a Roth IRA could be used to get emergency cash

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The novel coronavirus has put an alarming dent in many people’s retirement accounts – and quickly. Investors have been running scared, leading to some of the worst days ever for stocks and financial markets in general. Of course, these plunges can be especially harmful if you need to access your accounts now or in the near future.

If you’ve been laid off recently or own a business that’s now strapped, you might already be feeling the pinch and need emergency cash to cover your expenses. And even if you’re about to start retirement or have just entered, you may need to access retirement funds, but don’t want to hurt your long-term plans by hitting up your account too much or too early.

For those who have exhausted other alternatives for raising cash such as bank accounts, a personal loan or even a low-interest loan from a credit card, here are some strategies for securing emergency money from a popular retirement account — the Roth IRA — to help keep you afloat through tough times.

3 ways to tap your Roth IRA for an emergency

So let’s say you have a Roth IRA and you’re already at retirement age, what steps might you take to get some cash while still preserving your account, given the market’s plunge? If you own a lot of stock and you expect those positions to come back up in the near term, you’ll want to hold them for now. The point is to give more volatile assets time to recover, ideally a lot of time.

But if you have to take money out of your Roth IRA before you hit retirement age, you can take out any contributions at any time without a tax or penalty. (It’s one of the major advantages of the Roth IRA over the traditional IRA.) Meanwhile, If you want to take out earnings without a tax or penalty, you’ll need to have had the account open for at least five years.

1. Access any cash first

If you’re taking withdrawals from your Roth IRA, tap any cash you have in the account first. The money may be invested in a low-return money market account or some other low-return asset. Cash gives you the most options but the lowest return, and it is the safest asset available.

By taking cash from the account first, you give your other assets time to appreciate in value again, though given the nature of markets, it may take a while for that to happen. The longer you can give your volatile assets to recover, the more likely they’ll be able to grow.

2. Cash in less-volatile assets

Your account may also have fixed-income assets such as bonds or bond funds. Bonds tend to be less volatile than stocks, and so they may not have dipped as much (or at all) as markets went haywire. In fact, lower interest rates make bond prices rise, so your bonds might actually be sitting on a gain, depending on what you’re invested in.

Bonds pay regular income, so it may be better to leave them in an IRA to generate cash. Your best bet is to harvest only the cash they produce, allowing them to stay put. Of course, if you need cash, this approach may not be feasible, and you’ll need to sell the bonds.

If that’s the case, consider selling bonds or bond funds in pieces as you need the cash, rather than in one lump sum. You may be able to take advantage of dollar-cost averaging on your sales, reducing the risk that you sell out at a low point and miss a higher price later. This approach also leaves more money invested to generate cash before you sell.

If you need to sell a bond or fund, consider selling one that hasn’t moved much or likely doesn’t have a lot of upside potential. The goal is to sell what does not offer a lot of potential return.

3. Cash in lower-upside stocks

If it comes to it, you may have to sell stocks or stock-based funds – but which ones should you liquidate first? If you think your lower-performing stocks may rebound, then one avenue is to sell other stocks or funds with limited upside. Those stocks may be closer to full value and so it may make sense to take that money off the table at a halfway decent price while you still can.

Other stocks or funds may pay dividends, and you might prefer to keep those positions longer because they generate cash for you. While dividend stocks are probably more volatile than bonds, they may continue to generate cash, keeping you from cashing out other positions. With stocks down, dividend yields are much higher than before, but if earnings fall significantly, then companies may be forced to cut their dividends, potentially hurting stocks still more.

As with bonds, you may consider selling stocks piecemeal (especially now that trading commissions are zero at all major online brokers), allowing you to take advantage of dollar-cost averaging. That may help to mitigate your losses and help you avoid timing the market.

What if you don’t think stocks will recover?

Take a step back before you sell. Do you have a decade or more before you need the money? Do you have a broadly diversified portfolio of high-quality stocks such as the Standard & Poor’s 500 index? If you can answer yes to both of these questions, then you should consider holding. Heck, you might even consider buying more as the market plunges, scary as that may be.

The S&P 500 has an enviable track record. Over time it’s delivered about 10 percent average annual returns for investors who have bought and held through thick and thin. So if you have time or already hold this index or another broadly diversified one, strongly consider holding.

But if you need to sell and you don’t think stocks will recover, you might consider liquidating all the poor performers first and hanging on to the safer assets – exactly the opposite of the approach detailed above. The rationale: If things aren’t going to improve from here, you’ll want to get rid of the worst assets, which may continue to fall until this crisis is resolved. You might continue holding the safer assets and those that generate cash for you such as bonds.

Bottom line

Planning to live off your assets can be tough even during good times, but it can be especially difficult to plan for your retirement needs during a pandemic that is severely straining the economy and disrupting financial markets.

These questions are usually complicated, and so it can also be useful to consult a certified financial adviser – ideally one who is a fee-only fiduciary — as to the best course of action for your circumstances.

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Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior wealth editor