A member’s survival guide: 11 sources of income for you to consider during the current economic crisis
By David Weis, MBA
CFS* Financial Advisor at Arsenal Credit Union
You may be struggling with your personal finances, like many people around the world are due to the Coronavirus impacting their investments, job or health. Before doing a hardship withdrawal from your 401(k), getting a reverse mortgage or racking up more credit card debt to get by, consider other options first.
I’ve listed 11 options below, ranked from best to worst. Check out how some are good and others not so good.
As always, please let me know if I can be of assistance to you with professional advice and guidance, including investment options to potentially reduce volatility risk. We can talk over the phone, through email or virtually (live online video chat) through a WebEx meeting, whichever works best for you. This enables you to remain in the comfort of your home and protect your health during these unprecedented times.
1. Your own emergency fund
This is the first and best place to go to meet your monthly budget.
- As a general rule, money experts and financial education websites1 recommend saving enough money to cover three to six months of basic living expenses. Many people have difficulty setting that much aside, and most may have a safety net to cover one to three months. “Rainy day” money is typically held in a money market deposit account, checking/savings account or short-term CD.
- The main reason you have this type of account is for unexpected situations like this.
2. Paid time-off benefits
You are furloughed (temporary, mandatory layoff without pay, with the expectation of you returning to work). By law, furloughs can last up to a year; most are weeks long.
- Employers may allow you to utilize your accumulated paid time off, such as vacation, personal days or sick days and receive pay for them. Check with your employer.
3. Unemployment benefits
- If you are furloughed, there is typically a waiting period (that may be waived depending on your state) before you can file for unemployment.
- Contact your state’s unemployment office to determine your eligibility for benefits under the recently passed COVID-19 legislation (Pandemic Unemployment Assistance, Families First Coronavirus Response Act, and the Coronavirus Aid, Relief and Economic Security Act).
- Often the best way to file is to do it online. The state offices may not be running fully staffed or may be required to limit access to offices due to the pandemic.
- If you receive backpay for being furloughed, you will have to pay back any unemployment benefits.
- Laid off, terminated, or your contract was cancelled? Contact your state’s unemployment office immediately and apply for benefits.
- Benefits under the stimulus now include gig workers, freelancers and subcontractors who were previously ineligible.
- The CARES Act allows for additional federal benefits, up to $600 more per week for up to four months if you are eligible.
4. Other cash-type accounts
Special savings accounts like vacation funds, Christmas Club, cash investment brokerage accounts or other accounts that might be outside of tax-sheltered accounts.
- Essentially, money saved for discretionary use can help bridge the gap in a budget shortfall during this current personal financial crisis.
5. Roth IRA Contributions for 2019/2020
Before you make any contribution, consider whether those funds may be better used to maintain your financial well-being now. Wait to do this for your 2020 IRA contribution until next year, as you have until April 15, 2021, to do so. For a 2019 IRA contribution, you have until July 15, 2020.
6. Life insurance cash values
This may have been discussed with you when you purchased it.
- Loans/Withdrawals may be tax free and can be a source of funds.
- You may typically withdraw funds by either having them deducted from the cash value or considered a loan against the policy. Loans/withdrawals against the cash value may reduce the death benefit for your beneficiaries.
CFS does not provide tax advice. Speak with a tax consultant to discuss your specific situation.
7. Loan from your 401(k) account
The CARES Act allows for larger 401(k) loans or distributions of up to $100,000 for people who need the funds due to coronavirus-related issues. To be eligible, you will have to certify your need for the amount with your plan sponsor. Keep in mind that it is up to your employer plan sponsor’s discretion on whether to offer this capability. Check first regarding the loan terms, your eligibility and your employment status.
- To be eligible, you will have to certify your need for the amount with your plan sponsor.
- A loan may be better than a distribution because even though you will owe interest on the loan, that interest goes back into your own account. In addition, loans are not considered a taxable event as long as you repay it within the allowed timeframe. Certain restrictions apply; check with your plan. Essentially, you are borrowing it from yourself. Interest rates set by the plan administrator often tend to be reasonable.
- It only remains better than a distribution as long as you remain employed with the same employer, and you repay the loan over time. If you leave employment, you must repay the loan immediately or it’s considered a distribution and becomes taxable income, which means your loan amount will be subject to federal and state taxes.
- Borrowing from your own retirement cuts into your retirement savings. This is supposed to be your future money working for you until you retire and then help you in retirement.
- You are going to need that money in the future.
- Not only will you have to repay the loan, you will also have decreased the amount of savings invested and working for you until it is time to retire.
- In addition, it will be difficult to make regular ongoing contributions since you have to pay down your new loan.
- If you should lose your job, the loan must be repaid in full right away – often within 60 days or it goes from a loan to a distribution. In the latter case, you will owe federal and state taxes on the outstanding amount, which are taxed at the highest rate of ordinary income.
8. Home equity line of credit (HELOC)
This is another example of essentially borrowing from yourself. If you have been paying your mortgage for some time, you likely have built up the equity value of your home.
- On the plus side, HELOCs may offer reasonable loan rates if you have a good credit rating, a fair amount of equity built up and don’t borrow the vast amount of that equity.
- The negative side of this is that if you don’t have a good credit score, you may be in store for some steep rates – that is if the lender even provides you with a loan.
- In addition, if you must sell your home at a price lower than what you owe, you must make good on the difference immediately.
- Lastly, HELOCs are no longer tax deductible unless the funds are used specifically for home improvements, and most taxpayers are better off with the standard deduction versus itemizing.
CFS does not provide tax advice. Speak with a tax consultant to discuss your specific situation.
9. Hardship withdrawal from your 401(k) account
As mentioned before, the CARES Act allows for larger 401(k) distributions of up to $100,000 for people who need the funds due to coronavirus-related issues. Keep in mind that it is up to the plan sponsor’s discretion on whether to offer this capability.
- To be eligible you will have to certify your need for the amount with your plan sponsor.
- It eliminates the early withdrawal penalty of 10 percent if you’re under age 59½.
- Allows for the funds to be paid back into your 401(k) over three years.
- This withdrawal is considered income and will come with federal and state tax consequences. Federal taxes can be spread out over three years as well.
- The downside is that with the market being down, selling and withdrawing now makes it less than an ideal time to be pulling funds from those long-term assets for retirement to deal with a short-term problem.
- By the time you repay, the market may have rebounded. So, you might be selling low and buying high – not exactly a great outcome for you.
10. Reverse mortgage
This allows homeowners over age 62 to receive a cash loan in exchange for a portion or all of the equity of their property. The loan may come in monthly installments or as a lump sum.
There are pros and cons to reverse mortgages. Speak with a legal professional to discuss your specific situation.
11. Credit cards
This option may be the least beneficial due to the high interest rates and fees associated with most cards. Payments can go on for years without paying down the principal.
While your credit union offers rates on credit cards (starting at a 9.90% fixed annual percentage rate and 8.75% APR for variable rate) that may be more consumer friendly than those offered by commercial banks, using a credit card when you don’t have an income may lead to trouble down the road.
Need professional financial advice? I can help.
As always, please let me know if I can be of assistance to you with professional advice and guidance, including investment options to potentially reduce volatility risk. We can talk over the phone, through email or virtually (live online video chat) through a WebEx meeting, whichever works best for you. This enables you to remain in the comfort of your home and protect your health during these unprecedented times. My direct line is 314.919.1058. Email: David.Weis@cusonet.com.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
1Dave Ramsey, BankRate.com, The Motley Fool, NerdWallet.com, FinancialFinesse.com, Realsimplelife.com, CNBC.com, creditkarma.com