By Christine Benz of Morning Star
If the unexpected costs exceed emergency funds, see where you’ll go next.
1. Your own emergency fund/short term securities
Emergency funds should be held outside tax sheltered rappers and include highly liquid investments such as bank savings accounts, money market accounts, and more.
2. Low-risk assets in taxable accounts
Next, take a look at other taxable holdings that are out of the scope of taxable vehicles: Investing in securities accounts.
When identifying securities that may be sold to raise funds, you can focus on liquidity, tax outcomes, and the committees you are borrowing.
3. RothIRA’s contribution
Tapping on retirement assets is by no means great unless absolutely necessary, but the Roth IRA offers flexibility and has fewer strings than other tax-sheltered retirement vehicles.
Specifically, you can withdraw your Roth IRA contribution at any time without any penalties or taxes, but you will not be able to get a retirement fund.
4. Cash Value of Life Insurance
The cash value accumulated in your life insurance or fluctuating universal life insurance could be another decent emergency cash source. You can withdraw the money completely and deduct it from the face value of your policy.
Another possibility is to borrow from the cash value of your life insurance. You are owing interest on your loan, so these fees may be reasonable, but they are not necessarily low.
5. 401(k) Loan
A 401(k) loan is better than a difficult withdrawal, as the interest paid is paid back to your account.
On the downside, borrowing from the 401(k) plan will reduce your retirement savings. Not only will you have less money to work in the market, but having to pay off your loan with interest means you are unlikely to be able to make new contributions.
6. Home Equity Credit Line
If you need to take out a loan, the home equity credit line is one of the better options.
HELOC interest rates are usually reasonably compared to other forms of credit. Especially if you maintain a good credit rating, have a significant shares in your home and have not gotten a huge loan.
However, if you are not a perfect borrower, you may be asked to pay a high interest rate or be denied a credit line entirely.
7. Retreat of difficulties
Unlike a 401(k) loan that requires you to repay the money, you cannot repay the funds you take from the 401(k) via a difficult withdrawal.
Additionally, taxes will be paid on silent dollars that have not been withdrawn from your account. You will also bear an additional 10% penalty unless you are over 59.5 years old or if the situation meets any of several exceptions.
8. Reverse mortgage
Reverse mortgages allow older homeowners to receive an asset pool that represents their home equity. Homeowners do not need to pay off the loan as long as they are at home, but once they leave, the amount borrowed and interest will be deducted from the value of the home.
Reverse mortgage fees can vary widely, so shop and read the detailed print.
9. Margin loan
Margin accounts allow you to borrow against the value of the securities in your securities account.
This option is most appealing to those who have assets but don’t want to sell. Because that means bad times and tax outcomes. If you expect to be able to pay off your money quickly, then a margin loan could work.
On the downside, interest rates are not always attractive. They are also dangerous as the securities in your account are your collateral.
10. Credit Card
This is usually not a great idea. For most people, credit cards are the easiest way to destroy your financial position.
Not only is the high rate, but credit card companies also have all the incentives to keep you paying for as long as possible. Therefore, the minimum payment will not cause dents on the principal of your loan.
This article was provided to the Associated Press by Morningstar. For more personal financial content, visit https://www.morningstar.com/personal-finance
Christine Benz is director of personal finance and retirement planning at Morningstar.
