With layoffs and pay cuts hitting so many industries, an increasing number of people need access to cash just to make ends meet.
If money is getting tight, and you’ve exhausted all other options — federal stimulus check, job severance, unemployment insurance, personal emergency savings — you may have to make difficult decisions to access cash. Even if that means there’s a painful price to pay down the road.
So, I’ve come up with 10 ways to access cash if you’re in a pinch, plus the pros and cons of each option.
Please remember: Make sure you read the official documentation for each option below. If it taps into a CARES Act provision, ensure that you have documented everything properly and have all your paperwork in order.
1. Home equity line of credit (HELOC)
If you own a home that’s worth more than what you still owe on it, a home equity line of credit (HELOC) can be a great backstop to a cash emergency fund. The catch: You usually need to have it set up before you actually need it for an emergency. That said, if you have a strong credit score and a good amount of equity in your home, it’s worth looking into.
A HELOC ensures you have a line of credit available if you need it, but you aren’t paying interest on the loan unless you use it. The interest rates are variable, which carries risks and rewards. Right now, rates are at historic lows, and there are no signs of them increasing materially in the near future, so the risk should be manageable for quite some time.
A HELOC is essentially a revolving line of credit, but generally with much more favorable rates than a credit card. In some cases, like if you were to use it for home improvement purposes, it may even have tax benefits.
Home equity loans are different from a HELOC. With a home equity loan, you’re taking out a one-time loan and then making payments to pay it back, so there’s less flexibility. It’s similar to a second mortgage, and the interest rate is generally fixed. Given this protection, it’s often at a higher rate than a HELOC at the time they are taken out.
However, with both of these options, you must be aware that your home is the collateral. So, if you default, your home is at risk.
A HELOC is essentially a revolving line of credit, but generally with much more favorable rates than a credit card.
It’s very important to read all the fine print. These loans may have a period of low interest rates and low payments, but then there’s a balloon payment. You can refinance it before that happens, as long as the lender is willing, but you should be aware that it’s a significant risk.
2. Reverse mortgage
Tapping into a reverse mortgage is only appropriate in very rare circumstances. This option is generally used among people who are well over 62 years old — the minimum age to qualify — and would otherwise be selling their house, but can’t and want to keep living in their home.
With reverse mortgages, you’re basically selling your house back to the bank and, oftentimes, it’s not on the best terms. The fees can be very high.
3. Credit card debt
Right now, this is a good option because many credit card companies are willing to work with you on a credit card hardship program, either to skip a payment or lower the interest rate.
Some credit cards will also offer 0% interest for a period of time. If things get really bad, and you file for Chapter 7 bankruptcy, credit card debt will likely qualify to be dismissed.
And while that’s horrible, it’s often a better option than taking money out of retirement accounts, where in most cases the assets are protected in bankruptcy.
4. 401(k) loan
A 401(k) loan is a better option than a 401(k) hardship withdrawal. Normally, you’d pay it back in five years through paycheck withdrawals, if your 401(k) plan allows it. The CARES Act has increased the amount you can borrow and allows you an extra year to pay it back.
The upside of a 401(k) loan is that you’re paying the interest to yourself, as opposed to a credit card company or bank. Also, the extra year afforded by the CARES Act means you can probably delay the paycheck withdrawals and payments until 2021, if your 401 (k) plan allows it.
Another plus: As long as you pay back the loan on time, you don’t pay ordinary income tax on the money.
5. 401(k) hardship withdrawal / IRA hardship withdrawal
These are worse options than a 401(k) loan and should be considered as a last resort. That said, the CARES Act makes a 401(k)/IRA hardship withdrawal “less bad” and makes it function similar to a loan.
The good news: If you withdraw up to $100,000, the normal penalty for early withdrawal (before you’re 59-½ years old) is waived. You still have to pay the ordinary income tax, but you have the option to pay it over three years, giving you the option to put the money back into your retirement fund. That said, you will have now paid the tax on the money, so a Roth IRA might make more sense once you recover financially, if you qualify.
Note: With both options, you’re selling whatever investments those funds are in and, effectively, are locking in those prices, which may not be optimal.
6. Tapping 401(k) at 55 (if you’ve been laid off)
The longer you wait to tap into a retirement fund, the more it can grow — or, in this case, the longer it can recover.
If you can hold out, that would be best. Remember, you will also have to pay the income taxes if you decide to withdraw early.
7. Take your pension
There are many variables here, so it’s tough to address them all. It really depends on your specific company and their specific plan provisions.
In general, with a defined benefit plan, there will be a financial consequence if you withdraw your pension early. However, with some professions, such as police officers or firefighters, you’re able to retire after 20 years with no penalty.
8. Cash value of life insurance
This, too, depends a lot on personal circumstances. If money is tight, you can use the cash value of your life insurance to pay the premiums.
If you withdraw some cash value, the amount up to the policy basis or the amount you have paid is generally not taxable. The downside is that the death benefit could be reduced.
If you take a loan on the policy, and it isn’t paid back at the time of death, that could also reduce the death benefit. Plus, you’ll be paying interest to the insurance company.
If you’re older and no longer have any need for life insurance — maybe you have no dependents and your end-of-life expenses are funded in other ways — you can surrender a whole life policy to get cash.
You could also consider buying a less expensive term life policy that provides similar death benefits with the money to still protect your family.
9. Sell assets from a taxable brokerage account
This is a better option, compared to tapping into retirement funds. In this scenario, you’re probably either locking in losses or lower gains, but that’s it.
Because the market has come back from its recent lows, the sale price may not be that bad. Remember that, if the price is above what you paid for a stock, you will pay taxes on the gain.
If you’re going to sell a taxable account, it could make sense to not do it all at once because you may not need as much as you fear.
10. File early for social security
Filing early for social security will have negative repercussions for the rest of your retired life. You lock in lower payments forever.
Unlike many of the options on this list, it’s very hard to recover from filing early for social security. For example: You can pay back a HELOC with no long-term damage at all; however, you can never change the date you started social security.
Avoid filing for social security early if you can.