What It Means
An illiquid assetAssetsThings you own that are worth money, such as cash, investments, a home or a car. Your assets minus your debts is your net worth. See more is something you own that's hard to turn into cash quickly at a fair price. Selling it may take weeks or months, depend on finding a buyer, or cost you a fee or a lower price if you need the money in a hurry. Fidelity describes liquidity as how easily an asset becomes cash, and names real estate, private investments and collectibles as less liquid than stocks, bonds and exchange-traded funds (ETFsETFAn exchange-traded fund: a pooled investment fund whose shares trade on stock exchanges throughout the day at market prices. See more). Illiquid assets still count toward your net worthNet worthWhat you own minus what you owe: the value of your savings, investments, home and other assets, less your mortgage, loans and card balances. See more, though they can't cover this month's bills.
Try It: How Fast Does This Turn Into Cash?
Pick something you own and see how quickly it could become spendable cash, and the catch.
Liquid
Fairly liquid
Reachable, at a cost
Illiquid
You can withdraw or move the money when you need it. This is where emergency money belongs.
Fidelity counts stocks and funds among the more liquid holdings, but the price on the day you sell may be lower than you hoped.
The IRS generally adds a 10% tax on the taxable part of a withdrawal before 59½, on top of income tax, unless an exception applies.
A sale usually takes weeks or months: a buyer, inspections, paperwork and the buyer's financing.
A sale depends on finding a willing buyer, and when that happens is hard to predict.
Many private funds lock money in for years or charge a fee to leave early.
How It Sounds at Home
- "We're house rich and cash poor."
- "Most of our money's tied up in the house and the 401(k)."
- "It's worth a lot, but I can't pay the plumber with it."
The Breakdown
Worked example. A couple's assets, split by how fast each could become cash:
| Asset | Value | How liquid |
|---|---|---|
| CheckingChecking accountA bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit. See more and savings | $6,500 | Liquid |
| Brokerage account (index fundsIndex fundA mutual fund or ETF that aims to track the return of a market index, such as the S&P 500, instead of picking investments to beat it. See more) | $8,000 | Fairly liquid, price can move |
| Retirement accounts | $42,000 | Reachable, with extra tax before 59½ |
| Home, at a likely sale price | $310,000 | Illiquid |
| Car, at a likely sale price | $14,000 | Takes time to sell |
| Total | $380,500 |
After subtracting their $279,500 of debtsLiabilitiesDebts and other money you owe, such as a mortgage, a car loan or a credit card balance. Your assets minus your liabilities is your net worth. See more, their net worth is $101,000. The cash they could spend this week is $6,500, under 2% of everything they own.
What the result means. A healthy net worth and a thin cash cushion can sit side by side. If this couple's car needed a $2,000 repair, the $6,500 covers it. A job loss lasting a few months would push them toward selling investments at whatever price the market offers that week, or paying extra tax to reach retirement money early.
Good to Know
According to the IRS, distributions from a 401(k)401(k)A retirement plan run through an employer that lets you put part of each paycheck into investments, before tax or as Roth, up to a yearly IRS limit. See more or other workplace plan, or from a traditional or Roth IRARoth IRAAn individual retirement account funded with after-tax money, where qualified withdrawals, earnings included, come out tax-free. See more, before age 59½ generally owe a 10% additional tax on the part that's taxable, on top of regular income tax. The IRS publishes a list of exceptions, such as total and permanent disability or a series of substantially equal payments, so check it before counting on retirement money as a backup fund. For the home, Fidelity's liquidity guide notes a sale can take weeks or months, and a sale in a hurry may mean accepting a lower price.
FAQ
What are examples of illiquid assets?
A home or other real estate, collectibles such as art, antiques and rare coins, and private investments that restrict withdrawals. Fidelity's liquidity guides use these as examples of assets that take time, effort or price negotiation to sell.
Is a 401(k) an illiquid asset?
The funds inside it can usually be sold easily, but taking the money out early costs extra. The IRS generally charges a 10% additional tax on distributions before age 59½, on top of income tax, unless an exception applies, so treat it as long-term money.
Do illiquid assets count in net worth?
Yes. Net worth counts everything you own, liquid or not. Keeping a separate total for the liquid part shows how much you could actually use this month.
Do It in Buhata
Vault and Accounts
Record the home, the car and other valuables in Vault in Buhata and keep bank balances in Accounts, so you can see how much of what you own is ready cash.
Open BuhataRelated Terms and Categories
- Assets
Things you own that are worth money, such as cash, investments, a home or a car. Your assets minus your debts is your net worth.
- Emergency fund
Money set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly.
- Net worth
What you own minus what you owe: the value of your savings, investments, home and other assets, less your mortgage, loans and card balances.
- Early withdrawal penalty
The IRS 10% additional tax on money taken from a 401(k), IRA or similar account before age 59½, unless an exception applies.
- Home equity
The part of your home you own outright: its current value minus everything you still owe on loans secured by it.
Sources
Fidelity, "What is liquidity and how is it calculated?"; Fidelity, "Liquid alts and illiquid alts"; Internal Revenue Service, "Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs"; IRS, "Topic no. 557, Additional tax on early distributions from traditional and Roth IRAs"; IRS, "Retirement topics: Exceptions to tax on early distributions"
- www.fidelity.com/learning-center/trading-investing/liquidity
- www.fidelity.com/learning-center/trading-investing/alternatives-liquidity
- www.irs.gov/taxtopics/tc558
- www.irs.gov/taxtopics/tc557
- www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
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