Financial emergencies can catch you off guard. You can’t budget for an unexpected legal crisis, a loved one who suddenly needs expensive medical treatment, or is caught off guard by a layoff. Handled incorrectly, emergency fundraising to handle something unforeseen but urgent can impose unnecessary tax liabilities on you or wreak havoc on your financial plan – or both. Here’s how to get emergency cash with the least inconvenience to your financial plan. Consider working with a financial advisor to fine-tune your financial plan or create one from scratch.
Why it’s important to know how to get emergency cash
You can have a wide range of financial sources: savings, credit cards, brokerage accounts, tax-advantaged accounts as well as the ability to borrow. Withdrawing emergency money from some of these sources can have significant tax consequences, while withdrawing money from other sources is not a taxable event, but may adversely affect your asset allocation or other aspects of your financial plan.
This is why you must be ready to know where to go first, next and last to get money. Creating a careful sequence of sources with which to respond to emergencies reduces financial damage and shortens recovery times.
Which sources to tap first, last, and in between
Fidelity Investments has a prioritized list of financial resources for savers and investors to consider when facing urgent and sudden needs. By using the following list of eight sources in the order given, you will minimize damage from an emergency and shorten recovery time. Start with the sources of withdrawals without penalty; continue with low-interest loans; result in premature withdrawals from tax-advantaged accounts.
8 withdrawals without penalty
1. Emergency savings: Savings accounts are an incredibly useful financial tool. Not only do they keep your money safe and insured, but they allow your money to grow at a predictable yet modest rate of interest. There are a ton of basic savings accounts to choose from. You’ll get the most out of it by opening a savings account with no fees and a high interest rate. Consider setting up a savings account to cover six months or more of living expenses. And don’t forget to check out High Yield Savings Accounts as well.
2. Interest-free credit cards: “You should generally only do [this] if you’re sure you can pay off the entire tab before it starts accruing interest — which usually means before your next payment is due,” says Fidelity. “If you have a loan with a temporary 0% interest rate, be sure to repay it in full before the 0% rate expires.”
3. Non-retirement accounts: These include taxable brokerage accounts and the use of vested restricted stock, vested incentive stock options, or stock you purchased under a purchase plan. actions for employees.
4. Penalty-Free Withdrawal from the Retirement Plan or Account:
401(k): Withdrawing from this source can be without penalty if you are at least 59½ years old.
Traditional IRA: Withdrawing from a Traditional IRA may be penalty-free if you are at least 59.5 years old, have recently become permanently disabled, have large unreimbursed medical expenses, or experience one of the other exceptions specified by the IRS.
Roth IRA: There may be no penalty if you withdraw an amount equal to or less than what you contributed, or if the account has been open for at least five years and you meet one of the exceptions specific for penalties in the event of withdrawals.
If the emergency is medical, consider using a health savings account or flexible spending account.
Borrow at a lower cost
5. Low interest loan: Consider a home equity line of credit or apply for a personal line of credit through your bank. Fidelity suggests that “low interest rate” means 6% or less.
6. 401(k) loan: Fidelity notes that the interest you pay on a 401(k) loan goes into your own 401(k), rather than to a bank or credit card issuer.
Withdrawal from tax-advantaged accounts
seven. Premature withdrawal from the retirement plan or account: Be prepared for a 10% penalty if you retire before age 59.5 without meeting any of the specific exceptions, such as expenses related to medical needs, health insurance, college, purchase of a first home, a disability or military service (more than 179 days). ).
8. 401(k) Hardship Withdrawal: The IRS allows penalty-free 401(k) hardship withdrawals:
Pay certain medical bills for you, your spouse or your dependents
Avoid foreclosure or buy a principal residence
Cover education costs for you, your spouse or your dependents
Pay family funeral expenses
Pay for certain types of home repairs, such as those needed after a natural disaster
The eight sources of emergency cash above, listed in order of priority, are a strategic approach to protecting a financial plan.
We live in a volatile world: inflation at a high level for decades, falling stock and bond markets, war at NATO’s doorstep, imminent recession; and extreme domestic conflicts. These converging developments have increased the need to prepare for financial emergencies. It is essential to have a strategy for how to react so that your resources and plans are least affected. It all comes down to knowing what sources you should be getting money from initially, then and finally.
Tips for getting emergency money
A financial advisor can be a valuable ally when organizing your finances to deal with emergencies. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Use SmartAsset’s No-Fee Personal Loan Calculator to see what the financial implications of taking out a loan to deal with an emergency would be.
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