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Life is full of surprises, not all of them are welcome. If you face an unexpected financial surprise, it might be tempting to dip into your retirement accounts for cash. Believe us, there are plenty of better strategies.
“When you take money out of your retirement account, you are missing out on a market opportunity,” says Michelle Buonincontri, PCP, financial coach in Anthem, Arizona. “It’s investment growth that you may not be able to recoup. “
If you need cash now, these 10 options can help you meet your short-term needs or pay for a financial emergency without depriving you of long-term growth in your retirement accounts.
1. 0% APR credit card offers
Do you have good credit? If so, a credit card offering 0% introductory rate for six to 12 months may be a reasonable way to cover short-term expenses. Check the best choices of 0% APR cards, but make sure you have a plan to pay off the balance before the card’s regular interest rate goes into effect.
“A few years ago, I knew I had a payment of $ 5,000 coming up to start my business,” says Brandon Hill, founder of Bizness Professionals, a professional development blog. “Instead of spending $ 5,000 of my own money, I asked for a 0% rewards card. The card basically gave me an interest-free loan for 12 months, and thanks to the bonus reward, I received $ 750 in cash back.
One caveat with this method is that you must use it sparingly or it can affect your credit. You can’t just apply for a new card every time you need funds. And if you think there is a possibility that you may not be able to repay the funds before the promotional period is over, that is a bad option.
“Borrowers who have large debts on high-interest credit cards will have a hard time getting out of a financial hole,” said Nishank Khanna, chief financial officer of small business loan firm Clarify Capital.
2. Certificates of deposit (CD)
Certificates of deposit (CD) are savings vehicles that offer you a fixed interest rate if you leave your money there until a maturity date. If you have matured CDs, you can obviously withdraw the cash for all of your cash flow needs.
But if you have a CD that is not quite mature yet, you can also withdraw your money. Yes, you will probably have pay a fine, normally a few months of interest, but this can be considerably less than you would have owed in interest on a loan of a comparable amount.
3. Health savings accounts (HSA)
If you have access to a health savings account (CSH), you can withdraw money for eligible medical expenses, such as medical care, dental care, prescription drugs, and payments for long-term care services. You can also withdraw funds if you have kept receipts for past (unreimbursed) medical expenses.
Saving some of your emergency fund in a triple tax-free HSA can be a good strategy, as long as you pay current health care expenses with already taxed dollars and keep the receipts to reimburse you retroactively later.
In a pinch, you can even use your HSA without these saved receipts, since you’ll be paying both taxes and a withdrawal penalty when the funds are used for non-medical purposes.
4. Personal loans
Banks and credit unions offer personal loans with a fixed interest rate and repayment schedule, and the rates are currently quite low.
“Personal loans are best used for one-time expenses such as credit card payments, the purchase of a car or student loan payment during this period, ”says Michael Hammelburger, CEO of Bottom Line Group, a cost reduction consultancy.
If you go this route, it is important to assess how much you need and how much you can repay on a monthly basis. “These two factors are crucial when obtaining a personal loan, because anything beyond your financial needs will only affect the interest rate you have to pay back,” explains Hammelburger.
5. Home Equity Line of Credit (HELOC)
If you have equity in your home, consider a Home equity line of credit (HELOC) or home equity loan. These options use your home as collateral, so it’s important that you can manage the payments. Too many missed payments could result in your home being foreclosed by the bank.
Note that if you use the money to make improvements to your home, your interest payments may be tax deductible. Rates are generally competitive among lenders, so check with two or three before choosing one.
6. Peer-to-peer lending (P2P)
Peer-to-peer lending websites connect borrowers with individuals or groups of individuals who are willing to lend you money. Interest rates vary, and the best platform for you will depend on your credit and how much you want to borrow.
Peerform, for example, offers prices as low as 5.99%, but loans are limited to $ 25,000. Rates on sites like LendingClub and Upstart are over 8% for their top credit borrowers; LendingClub and Upstart offer loans of up to $ 40,000 or $ 50,000, respectively.
7. Brokerage margin loan
If you have a margin account in an online brokerage, you can borrow money with the investments in the account as collateral. The brokerage will charge you interest, but there is no set repayment schedule.
Keep in mind that if the value of the securities you are using as collateral drops below a certain threshold, the brokerage may issue a margin call which requires you to deposit additional funds or sell some of your investments.
This can become risky because depending on your margin agreement, your brokerage may have no responsibility for giving you that choice. He may simply sell some of your securities without notifying you to bring your account back to good standing, which means you could end up selling investments at a loss.
8. Life insurance
If you have a permanence life insurance policy with a cash value, you may be able to borrow against it. A permanent life insurance policy is a policy that lasts your entire life as long as you pay the premiums. This is different from term life insurance, which only covers you for a specific period of time (or “term”) and has no accumulated cash value.
Borrowing against your permanent policy requires sufficient cash value, which takes time. Call your insurer if you are unsure if this is an option for you. Keep in mind that borrowing will reduce the death benefit if you die before paying off the loan and you may have to pay interest, although it’s usually low.
If you haven’t already permanent life insurance, don’t go out of your way to get it just to use it as an emergency fund. The premiums for permanent life insurance policies are normally much higher than those for term life insurance policies, and the extra money you would pay each month can be better used to grow. liquid emergency fund.
9. Social security
If you have already reached full retirement age but have not started taking Social Security however, you can receive a lump sum distribution of up to six months of payments at a time. The amount you can take depends on how old you are beyond your full retirement age. If you’ve only reached your full retirement age for four months, for example, you can only claim up to four months of lump sum benefits.
While the influx of money can be helpful, it’s generally seen as a bad idea in the long run. This is because it reduces your monthly benefit to the amount it would have been if you had started taking Social Security several months before.
10. 401 (k) Loans
This option is in line with dipping into your retirement funds, and you should definitely consider other options if you need the cash now. Nevertheless, many 401 (k) plans give you the option of taking out a loan from your own account balance.
A 401 (k) loan allows you to borrow money from your balance without incurring the taxes and penalties you might face if you made a direct withdrawal. As with any loan, you will pay it back with interest. You are essentially paying yourself to take out a loan from yourself. 401 (k) loans are generally limited to $ 50,000 or 50% of your acquired account balance, but if you have encountered financial difficulty due to certain disasters recognized by the federal government, you may be able to take out a loan equal to $ 100,000 or 100% of your acquired balance.
As noted in the introduction, withdrawing money from retirement funds can seriously hamper your ability to retire on time, so proceed very carefully. And in addition to the missed earnings, keep in mind that if you separate from your current employer before you have paid off your loan, you will have to pay it back no later than when your taxes for that year are due; your business may even require earlier, depending on its policies.
If you cannot afford to pay off your loan within this time frame, you will need to treat the outstanding balance as an early withdrawal and you may owe taxes and a 10% penalty.