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Saving for retirement isn’t easy, and some of the unexpected financial emergencies that pop up along the way don’t make things any easier. Americans recently identified having too little set aside for emergencies and not enough saved for retirement as their two biggest financial regrets, according to a July 2023 Bankrate survey.

The two problems can collide when someone is forced to tap a retirement account like a 401(k) or IRA early in order to cover an unexpected financial need. But early withdrawals typically come with big penalties and can have a major impact on future retirement plans.

A November 2021 Bankrate survey found that 51 percent of American workers who have a retirement account or had one, say they’ve previously taken an early withdrawal.

The problem is that if you take an early withdrawal, the money can’t be redeposited into the account. Workers can’t make up the lost savings, and they lose the huge tax and retirement benefits of their plans, costing them thousands in foregone gains, if not more.

On top of that, early withdrawals can result in higher taxes, often with an added penalty of 10 percent. Those are a lot of negatives, and while there may be times when an early withdrawal is truly your only option, you do have other ways to access cash when you need it.

Five ways to avoid tapping your retirement accounts

1. Get an emergency fund (starting today)

The best way to avoid having to take an early withdrawal is to prevent the situation from happening in the first place – by having an emergency fund for those especially tough times.

An emergency fund is the foundation of any financial plan. It’s your own personal safety net, so that when the unexpected happens, you have cash to rebound and meet those expenses. This money can be earmarked in a special account, and you can even stash it in a high-yield savings account so the money isn’t just sitting there in a low-yield checking account, as it often does.

An emergency fund is the best first step to make, and you can do it relatively easily with an online bank, by opening an account with one of the highest yields in the country. Then consider depositing money regularly (even as little as $10 a week) so the money will be there when you need it. Experts recommend keeping at least six months of expenses in your emergency fund.

2. Tap a new credit card offer

This might be a less obvious avenue for accessing cash, but it is possible. If you have good credit, you may be able to open a new credit card with a special zero percent introductory offer.

You might be able to benefit in a couple different ways. First, many cards offer zero percent interest on purchases for a period of time, allowing you to either finance your emergency immediately or save the cash you otherwise would have spent and spend it instead on your immediate need.

Second, some cards allow you to immediately take out cash from the credit line and may offer you a low introductory rate, even zero percent, for a period of time. A cash advance will likely set you back a fee of 3 to 5 percent of the loan amount, however. In either scenario, you’ll still have to keep up with minimum monthly payments in order to not default on the balance.

Both these avenues could allow you to access cash quickly, but you’ll want to be sure that you can manage any payments that arise and preferably avoid carrying a balance when the card begins charging its regular interest rates, which could easily go above 20 percent.

3. Access your community

Depending on what you need money for, you may be able to offset some of your need via your social network or other community resources. You may be able to lean on friends for financial or material support, for example.

Community resources such as food banks and charities can also offer assistance. And your religious organization or others may be able to provide food or other aid. You can also call 211, a comprehensive source of information about local resources and services provided by the United Way, to learn about options in your area.

A common reason cited for taking an early withdrawal is job loss. If that’s the main cause of your financial distress, be sure that you file for unemployment and collect any benefits that you’re eligible for. While it likely won’t fill the gap completely, it helps.

4. Get a home equity loan or HELOC

A home can be a great asset – you can’t live in a stock, after all – but it does come with some drawbacks, especially if you have a mortgage. A mortgage can limit your financial flexibility, for example, and owning a house can tie up your money, making it hard to access.

That’s where a home equity loan or a home equity line of credit (HELOC) comes in. A home equity loan can give you a lump sum at one time, and often carries a lower rate. But you’ll be taking an installment loan and stuck with making an additional monthly mortgage payment. Your home is the collateral for the loan, so be sure you can meet the payments or you run the risk of losing your residence.

In contrast, a HELOC can give you the ability to access the equity in your house almost like a credit card. With a HELOC, you can take out what you need whenever you need it, up to your approval limit. Again, the interest rates will tend to be better than what you’d see on a credit card.

To access either of these loans, you’ll need to have equity in your home, which means you’ll probably have been paying down the mortgage on your home for a number of years first.

5. A loan can be better than an early withdrawal

While an early withdrawal comes with a lot of downsides, you may be able to take a loan from your 401(k) that eliminates at least some of those negatives. Nevertheless, you should be very careful about taking a loan from your account, and many employers don’t offer the option.

If your plan allows you to borrow, it may have some stringent conditions. It may charge setup fees and other administration costs. And there are limits to how much you can borrow, per IRS rules. You won’t be able to access more than (1) the greater of $10,000 or 50 percent of your plan balance or (2) $50,000, whichever is less. So your maximum loan is $50,000 in all cases.

Repayments must be made at least quarterly on the loan. According to IRS rules, a loan must be repaid within five years, unless it’s a loan to buy a principal residence. And if you don’t repay the loan? It’s treated like an early distribution, with all the taxes and penalties that accrue.

While the interest rate may be low, there are other reasons to avoid a 401(k) loan, if you can help it.

What qualifies for early withdrawal without penalty from a 401k or IRA?

There are certain circumstances which allow you to make early withdrawals from a 401(k) or an IRA without penalty, but even in those instances the withdrawal is subject to regular income tax. The details depend on the specific plan, but generally the following situations are exempt from the 10 percent early withdrawal penalty.

  • Hardship: You may be able to take a penalty-free distribution from a 401(k) if you can show an immediate and heavy financial need, according to the IRS. The withdrawal is limited to the amount necessary to satisfy the need and you must be unable to obtain the money from other sources. Medical expenses would likely meet the hardship requirement.
  • Educational expenses: You also might consider tapping an IRA for expenses related to higher education such as tuition, books or room and board. IRA withdrawals for this reason will avoid the early withdrawal penalty, but be sure to check that the expenses meet the IRS requirements.
  • First-time home buyers: If you’re looking to make a down payment on your first home, the IRS allows you to withdraw up to $10,000 from an IRA penalty-free. But you’ll want to work to rebuild those retirement savings as soon as you can to avoid an outsized impact on your retirement plan.

Bottom line

Many Americans with retirement plans take early withdrawals, but it’s usually best if you can avoid going this route. Of course, that isn’t always possible. In some cases, such as a home purchase or higher education expenses, it’s possible to maintain your retirement accounts, fund those expenses with loans or delay non-essential purchases. As the old financial saying goes, you can take out loans for your child’s education but not for your own retirement.

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