401(k)s & IRAs: Understanding Liquidity for Retirement Planning

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A liquid asset refers to cash or anything you can quickly convert to cash with little or no loss. For example, savings or checking accounts, certificates of deposit, and securities such as stocks and bonds qualify as liquid assets. Physical property, such as real estate, does not qualify due to the unpredictable length of the sales process. As retirement accounts, 401(k)s and IRAs operate both as liquid assets and non-liquid assets depending on the circumstance.

Retirement Account Liquidity

For working-age adults, 401(k)s and IRAs do not qualify as liquid assets, as their purpose is to provide funds for retirement – rather than immediately available money -- and they are set up accordingly. Before age 59 1/2, the IRS minimum retirement age, you must pay income tax on IRA withdrawals, and an additional 10 percent tax on both IRA and 401(k) withdrawals. The 10 percent additional tax and the loss it imposes make 401(k)s and IRAs non-liquid assets for those under 59 1/2. Those over 59 1/2 do not pay the additional 10 percent tax, which makes IRAs and 401(k)s liquid assets for retirees.