The coronavirus has touched every area of our lives. While the health scare dominates how we live, work and relate to one another, the financial impacts have also devastated many.
Lost jobs, furloughs, reduced work hours--many still feel a financial strain. And although these may be temporary, the pandemic is dragging on and that doesn't help you cover bills or feed your family.
Government stimulus payments may have helped, and there is hope of more to come, but the timing and what it will look like are uncertain. That's also true for how continued unemployment benefits will pan out.
Let me offer other possible ways to get or free up money quickly. A word of caution: Before you act, please talk to us or your financial advisor to make sure you make the right choice for you now and in the long run.
Before 2020, you would rarely—if ever—hear me offer this solution. I’ve always believed that keeping your retirement savings in tact is best for your future. But these are different times.
Thankfully, the government helped those affected physically or financially by COVID-19. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows retirement plan withdrawals (called Coronavirus Related Distributions or CRDs) without the 10% early withdrawal penalty if taken by December 30, 2020. This option covers workplace retirement plans and IRAs.
CRDs are available if your plan allows early withdrawals, AND you or someone in your household was diagnosed with COVID-19, or it affected you or someone in your household's finances. In addition, if you withdraw from a 401(k) due to the coronavirus, you won't be subject to the mandatory 20% federal tax withholding.
You can take a penalty-free CRD withdrawal from an IRA through December 30, 2020, if the need for the distribution results from a COVID-19 hardship.
The maximum CRD you can take from all plan types combined is $100,000. You still must pay income taxes on amounts you withdraw but you can spread them over three years instead of paying all at once. You may also be able to contribute back to the same retirement account to make up the withdrawal --which I highly recommend if you can do so.
There’s another option if you are still working for your company. You might be able to take a loan from a 401(k) or other type of employer-sponsored retirement account and pay it back later. My other caution: Only take what you need and keep as much in your retirement savings as possible.
If you can’t withdraw from a retirement account or don’t want to, here are some ways you could either get funds fast or otherwise free up money.
If your mortgage is backed by the Federal Housing Association (FHA) or government-backed Sallie Mae or Freddie Mac, there is relief. You should be able to work out an arrangement for reduced or deferred payments if your health or finances have suffered from COVID-19. Mortgage lenders cannot report arrangements or skipped payments to credit agencies.
What if your mortgage isn’t backed by the government? You may still be able to set up a plan with your lender. To help, some states have forbidden foreclosures and evictions for a time. Regulators also asked banks and other mortgage providers to extend loan periods to make up for missed payments brought on by the crisis. Just make sure you are aware of any fees or interest that may be added later.
Remember neither of these options are automatic. You must contact your mortgage lender to set up a plan.
The CARES Act allows you to defer loan payments too, including:
Also check with lenders and other creditors to see if you can defer or reduce payments for car loans, credit cards and other personal loans. Federal regulators have instructed institutions to work with their customers who have been impacted by the virus. In addition, many utility companies will work out payment plans during difficult times.
Just like the programs offered through mortgage companies, you must contact lenders, creditors and utility companies to discuss options. None are automatic.
This option may be possible if someone in your household is still working and if you qualify. Homeowners can borrow against equity in their homes as long as they keep at least 20% equity in the house after the loan. With fairly low mortgage rates, a home equity loan may give you a good interest rate. Check with your mortgage company or other lenders to find today's rates .
When you do pay it back, home equity loans usually have fixed interest rates and terms, so the payment will stay consistent over time. There are also no restrictions on how you use the money, and you'll receive it in a lump sum. On the downside, your home will be used as collateral, and you may have closing costs and fees, which sometimes can be rolled into the loan.
A credit card with a 0% introductory or balance transfer annual percentage rate (APR) allows you to pay off the balance over a period without interest. The key is to pay it off before the introductory APR runs out. If not, you'll be charged back the interest at a rate typically higher than a personal loan.
A final option, which I’m not adding to my official list because it has the potential to turn dicey, is to borrow from friends or family. It may cost less but could also have long-lasting repercussions on your relationships. You don't want to be "that" relative who never paid back Uncle Bill.
There are several ways to set up a family loan but be aware of the right way to handle them. The goals are to protect your relationship, the friend or family member and not violate IRS rules.
It's nerve-wracking to have expenses for which you don't readily have cash. But an uninformed decision may cost you in the long run. Review the alternatives and talk to someone before you make a move.
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