COVID-19: 4 options to consider if you need emergency cash
During the COVID-19 global pandemic, a lot of Americans are taking a closer look at their finances. And many are trying to make their money stretch until they’re back on their feet.
If you’re feeling some financial stress, you’re not alone. In a recent survey, nearly half of workers report they are somewhat or not at all confident they will have enough money to live comfortably for the next few months.1
We’re here to help you through this uncertain period.
When life throws you a curveball and you need cash, you can tap into the savings in your emergency fund. But if you need more than that right now, where do you turn?
You may be familiar with loans or hardship withdrawals offered by some retirement plans. With the recent passage of legislation, there may be new options available to consider if you need emergency cash due to COVID-19.
While each person’s situation is different, there are a few things to consider as you make some tough financial decisions.
1. Retirement plan loan*
This is for loans related to COVID-19. Meaning, if you, your spouse, or a dependent is diagnosed with COVID-19 or you’ve experienced “adverse financial consequences” resulting from quarantine, furlough, layoff, a reduction in work hours, inability to work due to lack of childcare, or closing or reduction in hours of a business operated by someone due to the virus or disease.2 (Log in to your account to see if your retirement plan allows this type of loan.)
COVID-19 related loans apply to 401(k) plans and certain qualified retirement plans and annuities.
Maximum is $100,000 or 100% of your vested account balance, whichever is less, for loans made within 180 days of the law’s enactment (March 27, 2020). Remember, this only applies if these loans are available in your retirement plan.
There are no taxes due if you repay the loan within its maximum term. Payments can also be delayed until 2021.
What to consider
- Do you think you could lose your job? If so, generally the loan balance must be paid off when you leave. The loan balance and any unpaid accrued interest is taxable, and potentially subject to a 10% penalty and 20% federal tax withholding.
- How it affects your long-term savings. You lose the potential power of compounding interest on the amount you borrow, meaning the overall loss to your retirement savings could be even greater.
- If you already have an outstanding loan from your retirement plan. Loan payments due from March 27, 2020, through December 31, 2020, may be delayed for up to one year, thanks to the CARES Act. Subsequent payments will be adjusted to account for the delay including additional accrued interest during this period. That temporarily can put money in your pocket.
2. Retirement account coronavirus-related distribution* (CRD)
The Coronavirus Aid, Relief, and Economic Security Act, commonly known as the CARES Act, allows employers to offer a new distribution (when you take money out of an account) that waives the 10% early withdrawal penalty if eligible for COVID-19-relief, as described above. This applies to traditional IRAs and retirement plans if your plan allows for this type of withdrawal.
The maximum you can withdraw collectively from your accounts is $100,000.
The usual mandatory 20% withholding for taxes won’t apply up-front (though 10% is held for taxes for some accounts unless you elect otherwise), but the income from these distributions would be subject to taxes equally spread over three years or within a year of withdrawal if you choose.
Log in to your account to see if this type of loan is allowed.
What to consider
- You can replace some of your “missed savings.” The CARES Act allows you to repay all or part of the withdrawal back into an eligible plan or IRA within three years. You still miss out on the interest the money would have earned, but at least you can replenish funds once you land on your feet financially.
- Are you comfortable with a loss? Taking money from your retirement account when the markets are down means you may lock in a loss rather than waiting for the markets to improve. “We can’t predict a recovery in the markets, but time in the market, vs. timing the market, is your best determinant of long-term financial security,” says Heather Winston, CFP®, assistant director of financial advice and planning at Principal®.
- How it affects your future retirement. When you lose the potential power of compounding growth on the amount you withdraw, the overall loss to your retirement savings is even greater.
Ways to trim expenses to help improve cash flow
Refinance your mortgage. If you haven’t refinanced in a while, you might be surprised how low the rates are. “There are fees for refinancing, but it may be a good option if you’re still working and concerned you may have a lower income in the coming months,” Winston says.
Share cars. If your family is driving less right now, could you share a car to eliminate a payment or sell a paid off car? One less car means lower insurance and maintenance costs, too. Then when your finances look better, you can revisit the decision.
Take a break from student loans. Payments and interest on all federal loans held by the U.S. Department of Education are suspended until September 30, 2020, thanks to the CARES Act. It will be automatic, so you don’t have to make a request. (Note: This only applies to federally-backed loans, not private student loans.)
3. Cash value life insurance loan or withdrawal
You may be able to take a loan or withdraw some of the cash value from your permanent life insurance policy. Consult your financial professional to help you understand if this is an option for the type of insurance you have and to determine if there are any tax consequences, especially if you’re making a withdrawal.
What to consider
- You don’t have to pay back a policy loan since you’re basically borrowing your own money. As long as the policy remains in force, the amount you borrow, plus interest, will be deducted from the death benefit paid to your beneficiaries. Over the long term, the performance of your policy will be better if the policy loan is repaid.
- As with most loans, you’ll be charged interest. But many policies will also continue to earn credit—helping offset the cost of the loan.
- Generally, withdrawals from life insurance are income tax-free. Consult your financial professional since there are complex tax rules.
4. Borrow money
Taking on debt is likely not your first choice for emergency cash. But if you’re in a difficult situation with your finances and qualify to borrow money, here are a few options.
Secure a personal loan
With a decent credit score you could snag a favorable interest rate from a bank or credit union. But “favorable” is relative: That still means 8%–12% because the loan is unsecured. If possible, secure the loan with an asset (such as a car that’s paid off) to lock in a lower rate.
Home equity loan
With your home as collateral you get a better interest rate and a longer payback. It’s easier on your monthly budget. Beware of how fees for appraisals and underwriting can add to the overall loan balance.
Home equity line of credit (HELOC)
Instead of fixed-term repayment, this is a variable repayment and interest rate. You may opt for an interest-only repayment, but that often comes loaded with a balloon payment, Winston says, and may be tough to afford.
Zero-interest credit card
These offers may give you a cushion—but watch the terms. “If the card’s interest is capitalized, that means once the initial offer expires, you could be on the hook for accrued interest during the offer period,” Winston says. “This can dramatically increase your principal balance and make it even harder to eliminate credit card debt. That’s why it’s important to pay back the balance on time if you transfer debt through this kind of offer.”
What to consider
- Interest rates are low. About as low as they’ve been in years. That can make borrowing a more attractive option, especially if it helps get you through a financial transition period. Check bankrate.com for current interest rates.
- Would your credit score qualify you for a good interest rate? Scores range from 300 to 850. Higher scores typically mean easier loan approvals and lower interest rates. Request a free report via annualcreditreport.com.
- Are you OK with having debt? Debt is (almost) a fact of life. If you’re weighing what to do and if you can afford to pay it back, this article may help: 5 questions to ask before you take on debt.
- Have questions about market volatility, investments, or retirement? Read our FAQ and learn how staying invested in the market can help you in the long run.
- Need help from a financial professional? They can help you with a personalized plan to keep your finances on track. If you’d like to meet face to face, we’ll help you find one.
*Retirement plans must be specifically amended to allow for the CARES Act loans and withdrawals. Just because the plan normally permits loans and withdrawals doesn’t mean they automatically offer them under the CARES Act.
1 Principal Financial Group, Consumer Pulse Survey, March 2020.
2 There could be other factors that determine adverse financial consequences, as determined by the Secretary of the Treasury or the Secretary’s delegate.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
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