The coronavirus pandemic continues its assault on the U.S. economy, forcing businesses to shut down, lay off workers, or cut hours.
Many Americans may need quick cash flow, beyond what can be generated by strict budgeting.
But who to turn to?
Here are some of the possibilities, according to financial advisers.
“Apply for unemployment benefits immediately,” said David Haas, certified financial planner and owner of Cereus Financial Advisors in Franklin Lakes, New Jersey. “There is no stigma here.”
However, not everyone is eligible to collect unemployment insurance. Those who receive benefits replace only about a third of their previous weekly salary, on average and for a limited period. It varies widely by state.
Some high-demand businesses like supermarkets and pharmacies hire workers. See quickly if you can find another job, even if you hope or plan to return to your original job when the economy eventually rebounds, Haas said.
Some states, such as New Jersey, have job sites created to help.
Taxable accounts – checks, savings, investment accounts, and certificates of deposit – are probably the second best place to withdraw money.
When it comes to taxable investments, consider selling fixed income securities (like bonds) and cash equivalents (like money market funds) before stocks, which likely trade at a steep discount given the recent market liquidation.
The Dow Industrials chart of President Trump’s election to March 23, 2020.
This would make your portfolio riskier, but give your stocks time to recover, said Stephen Rischall, CFP, co-founder of Navalign Wealth Partners in Los Angeles.
Those who sell investments with a net gain will have to pay capital gains taxes. Those who sell at a loss could benefit from the tax loss harvest.
Homeowners can use a home equity line of credit or reverse mortgage, or consider cash mortgage refinancing, especially with interest rates so low, said Jeffrey Levine, CFP, director of advanced planning at Buckingham Wealth Partners in Long Island, New York.
Cash refinancing allows a homeowner to swap an existing mortgage for a larger loan and pocket the difference tax-free. Lenders generally require homeowners to keep at least 20% of the equity in their home.
Let’s say a person has a house for $ 300,000 and still owes $ 100,000 on their mortgage. That person could potentially free up $ 140,000 by refinancing in cash, according to Bankrate.
This, of course, could lengthen the loan repayment for decades.
A reverse mortgage is only available to people aged 62 and over. It is a type of non-recourse loan, which means borrowers never owe more than the value of their home. There are risks – for example, as with a traditional mortgage, lenders could foreclose on a home if borrowers do not keep up with property taxes and maintenance.
Investors can use margin loans to borrow against the value of their taxable investments. This allows them to avoid selling investments for a loss or paying capital gains tax.
Investors can usually borrow up to half the value of their account. However, they should avoid borrowing the entire amount, said Charlie Fitzgerald, CFP, director of Moisand Fitzgerald Tamayo in Orlando, Florida.
This would help avoid a “margin call,” which could cause a brokerage to sell some of your investments if they fall in value.
Banks can also give signature (unsecured) loans to longtime customers, Fitzgerald said. Some customers with good credit may also get a bank loan with collateral like a car or other asset, he said.
Refinancing debt at higher interest rates – and subsequently reducing your expenses – is also a way to free up money, said Nicholas Hofer, CFP, president of Boston Family Advisors in Boston.
Pattanaphong Khuankaew / EyeEm
People with cash value life insurance (such as whole life or universal life insurance) can get a tax-free loan by borrowing against the cash value of their policy. This can be risky, however – too large loans can eventually lead to the “lapse” of a policy, causing you to lose your insurance and potentially have a heavy tax burden.
The cash value could also serve as collateral for a bank loan, Haas said.
Americans can withdraw money from individual retirement accounts or workplace savings plans like a 401 (k).
This strategy has many potential drawbacks, namely selling investments with reduced value, forgoing the growth of investments tax-free, incurring tax penalties and plundering a retirement account.
IRA and 401 (k) investors would pay a 10% penalty tax (in addition to income tax) to make a withdrawal if they are not at least 59 and a half years old. Roth IRA investors can withdraw their account contributions without penalty or income tax.
401 (k) investors have additional limitations. Some employers, for example, limit who is allowed to receive 401 (k) distributions, meaning that investors will only be able to access their money through a loan or hardship distribution.
Both could have adverse tax consequences and are only available if the person is still employed.
Congress is evaluating a bill that would allow 401 (k) and IRA savers affected by the coronavirus to withdraw up to $ 100,000 without penalty.
Asking for a loan from family members, while potentially uncomfortable, could be a lifeline for some.
“When times get tough, it’s part of the whole purpose of family,” Levine said. “I think everyone understands that this is a very unique time in our history.”