401(k) Tips

Do Liquid Assets Include 401k?

If you are evaluating your liquid assets, you could be wondering if a 401(k) is a liquid asset. Find out when a 401(k) is considered liquid or illiquid.

3 min read

Liquid assets are assets that can be quickly converted into cash without losing value. Assets such as accounts receivable, stock, and inventory are examples of liquid assets since they can be quickly converted into cash. Liquid assets help businesses and individuals settle arising liabilities and financial emergencies quickly. Usually, some assets tend to be more liquid than others, and you can maintain a pool of liquid and illiquid assets to meet financial emergencies when they occur.

401(k) accounts do not qualify as liquid assets until you reach retirement age. If you are not yet 59 ½, the IRS will require you to pay income tax on the 401(k) withdrawal, and an additional 10% early withdrawal penalty. The 10% penalty makes a 401(k) non-liquid. However, if you have attained age 59 ½, you will not pay a 10% early withdrawal penalty, and this makes the 401(k) a liquid asset.

Is a 401(k) a Liquid Asset?

For a working employee, a 401(k) does not qualify as a liquid asset, since its purpose is to accumulate retirement savings. If you are younger than 59 ½, you will owe a 10% penalty on the amount you withdraw. The penalty imposed on premature 401(k) withdrawals makes a 401(k) a non-liquid asset. However, once you reach the qualifying retirement age i.e. 59 ½, you can withdraw as much as you want without paying the early withdrawal penalty. Hence, a 401(k) becomes liquid once you have reached the IRS retirement age to -start taking penalty-free distributions.  

However, there are exceptions to the age 59 ½ rule. If you are 55 and you quit your job, you can withdraw your 401(k) money without paying the 10% penalty. In this case, the 401(k) is considered liquid, since you can access your money within a few days after leaving your job. Also, if your employer allows hardship withdrawals, you may be allowed to withdraw money for medical expenses, pay college expenses, or when facing a ‘foreclosure. You won’t pay a penalty tax on the hardship withdrawal.

Is a Roth 401(k) a Liquid Asset?

A Roth 401(k) account is more liquid than a traditional 401(k) since the former is funded with after-tax dollars. This means that you pay taxes when making contributions, hence you won't be required to make additional tax payments when you take a distribution. You can withdraw your retirement contributions from your Roth 401(k) account any time before or after retirement without owing taxes or penalties. You must have held the account for a minimum of five years after making the first contribution. 

However, there are different withdrawal rules for Roth earnings. If you are not yet 59 ½, Roth 401(k) earnings are considered illiquid, and any withdrawals are considered unqualified. Hence, you will owe a 10% penalty on the distribution. You can make a qualified withdrawal of Roth 401(k) earnings when you reach age 59 ½. You must have held the account for five years or more after the first contribution.

What are Liquid Assets?

A liquid asset is an asset that can be exchanged for cash. These assets are usually seen as similar to cash since their value remains the same when sold. For example, cash on hand is considered to be highly liquid, since it can be readily accessed when needed. For an asset to be considered liquid, it must have a ready market with a large number of potential buyers. Also, you should be able to transfer ownership of the asset easily, without any hurdles.

Some common examples of liquid assets include:


Cash is the most liquid asset, and it includes the cash you have on hand and ATM withdrawals. You can also access cash from your checking or savings account.


If you hold shares in a publicly traded company, you can sell the stocks on a stock exchange and receive cash in a few days. Stocks are highly liquid since there is a large pool of interested buyers on the stock exchange.

Certificates of deposit

You are required to hold your certificate of deposits until maturity to recoup your principal. If you decide to access the funds before maturity, you could pay a penalty equivalent to several months of interest.

Mutual funds

Mutual funds pool money from different investors, and the funds are then invested in diverse portfolios such as stocks and bonds. They are considered liquid since an investor can sell their shares and receive cash proceeds within days.

Money Market Funds

This is a type of fund that holds highly liquid assets like CDs, treasury bonds, and cash. These components can be sold at any time to raise cash.

What are Illiquid Assets?

Illiquid assets, also known as non-liquid assets, are assets that are difficult to liquidate, and it can take months or years to find a buyer for these assets. Usually, selling non-liquid assets within a short time tends to affect their value, and you could be forced to sell them at a loss. For example, when selling a real estate property, it can take months to reach an agreement, since accepting the earliest offer can result in losses. Other examples of illiquid assets include art, motor vehicles, collectibles, and intellectual property.