7 alternatives to raiding your retirement fund

Consider options to dipping into your retirement fund, including a P2P, a personal loan or moonlighting.

By Allie Johnson

Tapping your retirement fund early might look like an easy solution to a financial fix. But wait: It’s a move you might regret in your golden years.

No matter why you need money now, taking a distribution from your retirement savings is probably a bad idea, says Katie Gampietro Burke, a Jacksonville, Florida, certified financial planner. “I tell people, ‘Don’t do it,'” she says.

The problem: Not only do you steal funds from your future self, you may get hit with taxes and an IRS penalty for taking money early, she says. Taking a loan from your retirement fund, rather than a distribution, is better but not ideal, Burke says.

“It’s best to look at alternatives,” she says.

image 061416 upset couple financesBefore you drain the cash you’re saving for your senior years, consider these seven other ways to get extra cash:

  1. Cut back on costs and save up — Start by taking a hard look at your budget to find extra money you can funnel into savings, says Kelley Long, a CPA and certified financial planner with Financial Finesse. Do an audit of services for which you might be paying too much, such as cable, Internet and phone, Long says. “Make sure you’re not overpaying for channels you’re not watching or talk minutes you’re not using,” she says. Cut the gym membership you don’t use and subscriptions to magazines you could get at the library, AOL.com advises. Once you know how much money per month you can save, calculate how long it will take you to save up the money you need. Set up an automatic transfer of the saved money into a savings account on the day you pay your bills, Long recommends.
  1. Take out a personal loan — If you’ve got good credit, taking an unsecured personal loan from a bank or credit union might be a good option, says Thomas Nitzsche, media relations manager for Clearpoint Credit Counseling Solutions. Before you apply, crunch the numbers to make sure you can afford a loan. In general, you need a credit score of around 700 or higher to qualify for a personal loan with a decent interest rate, Nitzsche says. If your score is much lower, you might need to go a different route, Nitzsche says. “Some people just can’t get new credit,” he says.
  1. Get a peer-to-peer loan — Another option is to apply for a peer-to-peer (P2P) loan through an online P2P site. If you’ve got excellent credit, getting a peer-to-peer loan can be easy and quick. But if your credit is good or fair, you might get denied or pay very high interest. For example, P2P lender Prosper offers APRs ranging from 5.99 percent for the “best borrowers” all the way up to 36 percent. If you go the P2P route, read the terms carefully, check out the company thoroughly and look for Better Business Bureau accreditation, or at least a good BBB rating, Nitzsche says. “As long as the terms are favorable and the interest rates aren’t crazy, a peer-to-peer loan can make sense,” he says.
  1. Boost your income — Consider moonlighting at a second job, freelancing on the side or starting up a home-based business to earn extra cash, Nitzsche says. For example, you could sign on as an Uber driver or rent out a room in your home, he says. The personal finance blog The Penny Hoarder offers a list of creative ways to make money, such as officiating at weddings, tutoring students online or participating in paid focus groups. “You can get really creative with ways to bring in extra income,” Nitzsche says. Plan to do the extra work for a set time period so you can keep the end in sight, he recommends. “It’s really easy to get burned out when you’re burning the candle at both ends,” he says.
  1. Sell an asset — Take an inventory of your stuff to see if you have items you could sell, Nitzsche says. For example, Nitzsche says he has a 12-year-old boat that could probably bring in $5,000 in a pinch. Antiques and collectibles such as baseball cards are also a good bet, he says. Other ideas: Sell baby clothes, unused wedding China, electronics and video games, the personal finance blog Money Pantry recommends. “Many people have a ton of stuff,” Nitzsche says.
  1. Tap into equity in your home — If you own a home and have enough equity, a home equity loan or line of credit might be a good way to get the cash you need, Burke says. Leveraging your home equity can be an especially good option if you need the money for a big home repair, such as a new roof, she says. But it’s not so great if you’re using the money, for example, to consolidate credit card debt, according to Burke. That’s because you’d be trading unsecured debt for secured debt. Unlike credit card debt, if you default on a home equity loan, the bank can foreclose on your house, she says.
  1. Borrow from a loved one — A loan from a family member or friend can get you out of a financial bind, but could cost you the relationship, Nitzsche says. “There may be hard feelings,” he says. Or secrecy. For example, your mom might say, “Keep this secret so your sister doesn’t find out,” he says. On the upside, a loved one might overlook shaky credit and offer you low or no interest. However, take a loan only if the lender is willing to make a gift of the money if you hit hard times and are unable to pay it back, Nitzsche says.

If you’re considering tapping your retirement fund, or pursuing one of these alternatives, meet with a credit counselor at a reputable nonprofit credit counseling agency, Nitzsche recommends. The counselor can go over your budget, assets, debts and income, and help you come up with a plan — and possibly avoid debt. “We always try to be strategic and help people think outside the box,” he says.