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4 Cash-Raising Problems (and Better Options)

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4 Cash-Raising Pitfalls (and better alternatives)

If you require cash urgently be sure to take a moment to think about what options could hurt you in the long run.

By Liz Weston, CFP(r) Senior Writer | Personal Finance, credit scores, economics Liz Weston, CFP(r), is a personal finance columnist co-host of the “Smart money” podcast an award-winning journalist, and the creator of five novels on finances, which includes the best-selling “Your Credit Score.” Liz has appeared on numerous national radio and television shows, including”Today,” the “Today” show “NBC nightly news,”” as well as the “Dr. Phil” show, and “All things considered.” Her columns are carried in the media by The Associated Press and appear in hundreds of media outlets weekly. Prior to NerdWallet, she wrote articles for MSN, Reuters, AARP The Magazine and the Los Angeles Times. She lives located in Los Angeles with a husband along with a daughter and a golden retriever that is co-dependent.

Aug 5, 2021

Editor: Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years at The Oregonian in Portland in roles including copy desk chief and team editor and designer. Previous experience included copy editing and news for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor’s degree in journalism and mass communications from Iowa’s University of Iowa.

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If you’ve got more bills than cash, the standard recommendation is to reduce expenses and generate additional income. However, some methods of doing this are more costly than others. Here are four that ought to be avoided, as much as possible, and the alternatives you should be thinking about instead.

Be wary of raiding retirement plans

A large portion of contributions to retirement plans leaks out through cash-outs and hardship withdrawals in the event of job changes, or loans that aren’t fully repaid. A recent study for the Congressional Joint Committee on Taxation estimated that each year 22% of the money from people 50 years old or less is withdrawn prematurely, mostly in cash-outs as people leave jobs.

They are, however, usually costly and could leave you with a small amount of savings when you retire. The majority of people have to pay tax penalties and income taxes on distributions, and you forfeit all tax-deferred compounding that money could have made.

You might have alternatives. If you’re still employed you could borrow out of you 401(k) or stop retirement plan contributions temporarily to free up funds. If you’re a member of an Roth IRA, you can withdraw the amount equivalent to your contributions without owing taxes or penalties.

If you can’t avoid a costly cash withdrawal, it is possible to minimize the impact by taking out only what you need and leaving the rest to increase. For example, if you’re leaving your job you can roll over the 401(k) balance in an IRA and withdraw only the amount you require out of the IRA. That could prevent having to withdraw the entire account.

Be sure to take advantage of health insurance.

You might be in good health right now however, you’re one serious accident or illness away from devastating medical costs.

If you don’t have access to health insurance through work, look up the Affordable Care Act exchanges at . The cost of premiums has been reduced for most people this year and the coverage is available for many, not just those who get unemployment insurance this year.

A study by the non-partisan health think group KFF found that the number of people eligible for subsidies has increased by 20% because of the American Rescue Plan Act passed in March. In addition, 4 out of 10 uninsured people are eligible for a no-cost or nearly free health plan.

Also, you can cut down on premiums by opting for high-deductible plans. This means that you will have to pay many thousands out of your pocket if you get injured or sick and you’ll avoid the type of six- or five-figure bills that could bankrupt you.

Beware high-cost loans

One of the most costly ways to borrow are auto title loans as well as loans that don’t require credit checks. These high-cost loans can make it simple to fall into a cycle of debt that you can’t make the payments and are then forced to take out again. Car title loans can put your vehicle on the risk of having it confiscated in the event of non-payment.

They might not be as swift or convenient, but they’re often better for your financial health:

If you require help with paying bills, begin by looking up 211.org an online clearinghouse of the government’s resources and charity’s.

If you are unable to pay for a loan and you aren’t able to pay it, talk to the lender about forbearance and other alternatives to hardship.

If you own credit cards, think about the cash advance. These typically incur double-digit interest rates, but the most expensive loans typically have triple-digit rates.

If you’re employed, request an advance on your paycheck or an emergency loan.

Another option if you’re employed: such as Earnin, Dave or Brigit. Be aware but be aware that fees could make these loans more expensive than payday loans, and trap you in a similar cycle of debt should you come to rely on these loans.

Don’t stiff the IRS

If you’re unable to pay the tax due, it can be tempting not to file a return. But failing to file carries far more penalties than failure to pay, says CPA Neal Stern, a member of the American Institute of CPAs’ Financial Literacy Commission. In addition, there is no time limit for audits when you do not make a filing. The IRS may be able to pursue you for many years or even decades later.

The IRS has payment plans that allow you to pay your bill over time. You can also charge a tax charge to a credit card , or think about getting a personal loan to pay for what you are owed, Stern says.

It is not a good solution. The IRS has automated processes that link forms such as W-2 and 1099 with tax returns, and if something is missing it can quickly lead to an electronic discrepancy notice or an audit, Stern says.

If you are owed money and you don’t pay it, the IRS can seize your bank accounts or garnish your paychecks as well as other income until all unpaid taxes, penalties and interest are paid, Stern says. The IRS can even seize and even sell your home.

“The IRS is probably the most effective and ruthless collection agency that you will ever encounter,” Stern says. “If you owe taxes, it’s best to pay the maximum amount you can, as fast as you are able to.”

The article was written by NerdWallet and was first printed by Associated Press.

Author bio Liz Weston is a columnist at NerdWallet. She is certified as a financial planner and author of five books on money which include “Your Credit Score.”

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