Are 401(k)s & IRAs Liquid Assets?
People who make contributions to 401(k) accounts and Individual Retirement Accounts can decide what kind of investments to purchase with those funds. Some investment options, such as savings account IRAs, are more liquid than others. However, IRAs and 401(k)s are not generally regarded as being liquid because the accounts are designed to hold money until retirement, and people who make premature withdrawals must pay tax penalties.
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401(k) Accounts
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Funds contributed to 401(k) accounts are typically invested in mutual funds. Plan participants can choose which funds to invest in, and most plans enable people to sell existing shares and invest in new funds while keeping the money inside the 401(k). Mutual funds are traded once daily after the close of the stock market, and it normally takes a few days for someone selling mutual funds shares to receive the sale proceeds. Therefore mutual funds as an investment instrument are not as liquid as other types of accounts that enable investors to have same day access to funds.
401(k) Access
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You cannot withdraw funds from your 401(k) whilst still working for your employer unless your company's plan has a provision for hardship withdrawals or in-service withdrawals. You can make a hardship withdrawal from a 401(k) plan if you need the funds to avoid foreclosure or settle a similarly pressing financial problem. You can make an in-service withdrawal, which involves selling your 401(k) fund holdings and moving the proceeds to an IRA if your are over the age of 59 1/2. These withdrawal restrictions mean that 401(k) accounts are very illiquid.
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IRAs
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You can invest IRA funds in mutual funds, stocks, bonds, certificates of deposit and even savings accounts. You can make withdrawals from IRA savings accounts at any time and receive the cash proceeds on the same day. Withdrawals from IRA CDs are limited as you are normally required to keep funds in the account until the CD term finishes. If you withdraw funds from any type of Traditional IRA or 401(k) prior to age 59 1/2 you must pay ordinary income taxes on the amount withdrawn and a 10 percent tax penalty.
Liquidity
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People over the age of 59 1/2 do not have to pay the tax penalty for withdrawals. For people past that age with a liquid type of IRA investment, traditional IRAs are liquid investments. For all others both 401(k)s and IRAs are generally illiquid. People over the age of 59 1/2 who access funds from Roth IRAs, which are funded with after-tax earnings, do not pay a 10 percent tax penalty or ordinary income tax, so Roth IRAs containing savings accounts are highly liquid for retirees. People who access Roth IRA funds prior to age 59 1/2 must pay taxes and a 10 percent tax penalty on the accounts earnings.
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