Cash Flow Alternatives for Achieving Life’s Goals
One of life’s ongoing challenges is developing effective strategies for achieving your goals and wishes within the confines of your particular financial circumstances. Each stage of your life can create new financial challenges like sending your child to college, remodeling your home, caring for an elderly relative, or starting your own business.
Even when your overall financial situation appears relatively secure, your available cash flow may be constrained. Should you be faced with such a dilemma, here are some alternative sources of cash that may assist you in financing your various life stage goals:
You can take distributions from your traditional Individual Retirement Account (IRA) at anytime. However, you will have to pay income taxes on these distributions. In addition, if you are under age 59, your distributions may be subject to a 10% federal income tax penalty.
There are no penalty taxes incurred on early distributions due to disability, for medical care expenses to the extent allowable as a tax deduction, or if the withdrawal is part of a series of equal periodic payments based on your life expectancy. Also, bear in mind that by taking premature distributions, you are sacrificing the benefits of tax deferral and may put your retirement goals at risk.
Borrowing from Your 401(k) Plan
Some plans may allow you to take an income tax-free loan from your 401(k). Interest rates are generally comparable to those of commercial loans. However, failure to repay the loan within a specified period of time (typically five years) may lead to penalties and potentially void the tax-deferred status you enjoy under the plan.
If you terminate your employment, your employer may demand repayment within 60 days, and you might owe taxes and penalties on the unpaid balance. Perhaps most important, borrowing from your 401(k) can defeat the plan’s ultimate purpose building tax-deferred savings to help provide retirement income.
Life Insurance Policy Loans
If you own a cash value life insurance policy, in most instances, you can borrow against the policy’s cash value. In actuality, a policy loan is a loan in which an interest is also charged on the outstanding balance.. Additionally, if the policy lapses while the loan was still outstanding, then the policy owner would receive a Form 1099R from the insurance company, which could create a taxable event for the policy owner.
You need not promise to repay a policy loan (although you may repay it). However, if it is not repaid prior to your death, it will be deducted from the death benefit proceeds of the policy. It is important to consider the potential effects this may have on your beneficiaries.
If you are a homeowner, you may be able to access a significant portion of the equity on your principal residence through a combination of first and second mortgages and equity loans. Rates on such loans are traditionally low. However, keep in mind that home equity is not a limitless pot of gold that can be dipped into at will; it needs to be refilled, and refilled with interest, within a specified period of time.
You must always remember that you are ultimately putting your home on the line, for the loan’s purpose. Therefore, you should cautiously use such funds. For instance, it may be considered unwise to trade off the equity in your house, which is a tangible, long-term asset, for the sake of items that are easily consumed, such as vacations, clothing, or jewelry.
Borrowing from a bank is always an alternative, especially if your credit history is good, you meet certain financial requirements, and your intended use of the borrowed funds will help you achieve a well-defined goal. Loans for education or to start up a business are fairly common. However, when considering loans from a bank, it is important to be sure you can meet the monthly loan payments.
The ever-increasing availability of credit card loans has resulted in a tempting, yet expensive, borrowing option. Credit cards can be a good source of quick cash when you are certain you will be able to promptly repay the loan. However, because credit card loans often carry very high interest rates and finance charges, they can be unnecessarily expensive.
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