Finding the Cash You Need
Everyone experiences times when they are short on cash - whether you are a young person in school or just entering the work force; a busy parent juggling career demands and family needs; or approaching or already in your retirement years.
Cash crunches may be due to large unforeseen events, such as a health crisis, a car breaking down, or the loss of a job. However, they may also be the result of previous poor decisions of piling on debt you cannot afford or a lifestyle you can no longer maintain. So, even while we look for ways to find the cash needed to “stop the bleeding,” let’s not forget that ultimately it may be necessary to “fix the broken leg.”
What do you have?
Take an inventory of what you have – and what you owe. List the balances of your checking, savings, and brokerage accounts; life insurance and annuity values; retirement accounts; home or other real estate; and cars and personal property. Now do the same thing with your debts: credit cards, auto loans, student loans, mortgages, etc.
Cash Accounts – The most obvious place to start is existing cash accounts – checking, savings, money markets, CDs, etc. It is good to have an emergency fund, but there are also times when it is necessary to tap into that emergency fund.
Brokerage Accounts – Next, look at your personal (non-retirement) brokerage accounts. Don’t forget that if you sell investments in these accounts to generate the cash needed, taxes are incurred on the appreciation of those investments. If the gains are large, it may be possible to borrow against those investments instead of selling them, but be careful with borrowing, because more debt may be a bad longer-term decision.
Life Insurance – If you have a life insurance policy that has a “cash value,” you may be able to borrow against that cash value. If you no longer require the life insurance policy, instead of borrowing the cash value, you could consider surrendering the policy and receiving the cash outright. However, think carefully about surrendering a policy if your family still requires the protection of the death benefit.
Retirement Accounts – Employer retirement plans (such as 401ks) may provide you with the ability to take a loan from your account. Normally, loans are limited to one-half of your account value, with a maximum loan limit of $50,000. In some circumstances, instead of a loan, a distribution may be taken from a qualified plan, even while you are still employed. However, distributions are taxable and may also be subject to a 10% penalty if you are under age 59 ½. Just for the year 2020, the CARES Act raised the maximum loan to $100,000. Alternatively, the CARES Act allows for distributions of up to $100,000 that are not subject to the pre-59 ½ age 10% penalty – but are still subject to income taxes.
You cannot borrow from an IRA. Withdrawing from a traditional IRA is taxable plus a 10% penalty if under age 59 ½ - although there are some exceptions to the penalty. Withdrawing from a Roth IRA may or may not result in taxes and penalties – depending on how much you withdraw, your age, and how long the account has been opened.
Home Mortgages – If you own a home or other real estate, a home equity line of credit or perhaps a refinancing of the original mortgage might be considered. Today’s record-low interest rates provide an opportunity to lock in an attractive long-term rate.
Asset Sales – In some cases, a sale of an asset – such as a car or real estate may be required. Gains on the sale of a personal residence may be tax-free if you have lived in your home for at least two years.
Credit Cards – Using existing credit cards or applying for new credit cards may look attractive but avoid this option if possible. Interest rates are high, and this type of debt is more often the problem, and not the solution.
Having to quickly come up with cash you had not expected can be very unsettling. But you do have options and should carefully consider the pros/cons of those options.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is President of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina.
The opinions expressed are those of Gerald Townsend, President of Townsend Asset Management. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Forward looking statements cannot be guaranteed. Past performance is not indicative of future results. This material is not financial advice or a recommendation to buy or sell a particular security or product. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. Townsend Asset Management Corp. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm and its employees can be found in its Form ADV Part 2, which is available upon request, and on our website. TAM-20-82