Published September 07, 2011
If you need cash fast to meet a high deductible or personal expenses, look to these sources for relief.
After Hurricane Irene, the East Coast earthquake and Midwest tornados, Americans have weathered a lot this year.
According to the National Climatic Data Center, natural disasters in 2011 have already caused more than $35 billion in damage -- not including Irene. If you're hit with an emergency and need to find cash fast, tap into your emergency cash reserves first; then look to these resources.
Friends, feds and family
If you need to find cash fast, ask loved ones first, says Pamela Yellen, author of "Bank On Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future."
"Never ever treat (a family loan) casually," she says. "Put it in writing. Assign a fair interest rate to it. ... Treat it like any other business relationship."
While your family lender doesn't have to charge the full market interest rate, they have to charge you something for the transaction to be considered a loan and not a gift that could have tax and estate planning implications. The government publishes a monthly list of applicable federal rates, or AFRs, that provide minimum interest rates on loans made between family and friends. If your loved ones aren't in the black right now, peer-to-peer lending sites can connect you with wealthy strangers.
In gravely disastrous times, Uncle Sam might also help.
"If someone gets their house run over by a hurricane, they might be eligible for assistance from FEMA," says Casey Weade, vice president and CFP with Howard Bailey Financial, a consulting firm in Fort Wayne, Ind.
According to the agency's website, the Federal Emergency Management Agency provides disaster assistance for temporary housing, home repair, disaster-related medical and burial expenses, vehicle damage and cleanup costs, while the U.S. Small Business Administration offers federally subsidized loans for home and business owners. To qualify for either, borrowers must live in a FEMA-declared disaster zone and file a claim with their homeowners insurance first.
Permanent life insurance policies are excellent emergency resources because they're accessible, you can borrow against them without having to qualify for a loan and you can pay a policy loan back on your own schedule.
"You can borrow up to about 90% of the cash value of the policy. There are no immediate income tax consequences unless the loan isn't repaid," says Roland Jones, a CFP with Moneta Group, a financial services firm in Clayton, Mo.
Though rules vary among insurance providers, many require policyholders to own their policies for a few years before borrowing. You'll also be charged interest for taking out a policy loan, which will be deducted from the death benefit until you pay the loan back, reports the New York State Insurance Department.
Just don't borrow too much. Should the loan and accumulated interest become greater than the surrender value of the policy, policyholders could find themselves having to pay significant premiums to keep the policy in force. Variable policy owners should exercise extra caution, Jones says, since the stability of their policy is contingent on market performance. Borrow too much and one market dip could put your policy underwater.
People say, 'Oh I can't take my money out of a CD, there'd be a big penalty.' Often that penalty is very minimal and it's only on the interest," says Weade.
Weade says that with interest rates low, sacrificing some CD earnings is a pittance compared to paying interest rates on a life insurance loan or cash advance. Savings bonds are another quick cash resource, though you'll pay a three-month interest penalty if it is redeemed too early, reports the U.S. Treasury. In both cases, you'll pay income tax on any interest earned.
Of course, you can sell stocks (and realize a capital gain or loss accordingly) as well as mutual funds and annuities, but Weade says those taking this route should consult a financial adviser about tax issues and penalties.
Retirement and 529 accounts
If you have to borrow from your future to pay present obligations, so be it. According to the Securities and Exchange Commission, investors who pull funds out of a 529 plan for nonqualified education expenses will pay income tax and a 10% penalty on earnings. Those investing in plans that offer state tax incentives may have state tax consequences, too.
"The IRS does provide a 60-day window for you to withdraw funds from a traditional IRA or 401(k)" for rollover purposes, says Jones. As long as you deposit the same pretax amount into another eligible retirement plan, you won't pay taxes or penalties. The 60-day rule is tricky for larger withdrawals, Jones says. If you can't replace the funds in time, you'll pay income taxes and a 10% penalty on the taxable amount if you're under age 59�.
Roth IRA holders may withdraw their own contributions -- not earnings -- without tax or penalty. Traditional IRA holders may start taking penalty-free distributions on their accounts if they begin taking regular distributions, but specific rules apply.
Since taking early IRA distributions can severely disrupt your future retirement plans, "You wouldn't do that unless it was the only option," says Kirk Shamberger, a partner with CK Financial Resources in Colchester, Vt.
With 529 plans and IRAs, the problem is time. Regardless whether you get around the tax and penalty rules, pulling funds early limits the compound interest you can potentially gain from them in the future. A 401(k) loan is usually a better option. The IRS reports that 401(k) holders can borrow up to half of their account (a maximum of $50,000) tax-free, but funds must be repaid within five years in most cases.
The catch is that you have to stay with your current employer for the duration. "Should you lose your job and have a loan outstanding, you've got to pay it back within 30 to 60 days or you'll have to pay penalties," says Yellen.
Before pulling funds from any long-term investment, read the fine print and consult your tax adviser.