January 8, 2021

Over the past several months, millions of Americans have lost their jobs due to the Coronavirus pandemic. This sudden loss of income has shown how many of us are unprepared to withstand a financial emergency.

While the stimulus check and unemployment benefits have helped bridge the gap, it still may not be enough to cover your monthly expenses.

What are some of your options if you need to access cash? Below are a couple of ways to help you get fast cash:   

Borrow and/or Withdrawal from Retirement Account

  1. 401(k) & IRA Withdrawal

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted which provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans1.

You are eligible for the coronavirus-related distribution if you, your spouse, or dependent have been diagnosed with COVID-19 or you have experienced adverse financial consequences because of COVID-19. The special distribution allows you to withdrawal an aggregate limit up to $100,000 from all retirement plans and IRAs through the end of 2020.

The 10% penalty for early withdrawal is waived for those under 59½ for the coronavirus related distribution. You also have the option to pay the federal income tax on the withdrawal or repay the full withdrawal amount over a 3-year period starting with the year in which you receive your distribution.

  1. 401(k) Loan   

Most 401(k) employer retirement plans allow you to borrow as much as 50% of your account balance up to $50,000 and you have 5 years to repay it. However, if you quit or lose your job, you must repay the 401(k) loan, or it becomes taxable.

Note: The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals for plan loans made to a qualified individual from March 27, 2020, to September 22, 2020.

However, not all employers have adopted the new CARES Act provisions, so it’s important to check with your employer first to see what options you may have.

Borrow money from your Life Insurance policy

You can only borrow against a permanent or whole life insurance policy. These types of insurance policies have two values: the face value or death benefit and the cash value.

The cash value is like a savings account. As you pay premiums, part of it goes into a separate account that builds up cash value. When there is enough cash value built up, you can borrow against it with no questions asked.

There is no application process, unlike a bank loan or credit card and the policy loan does not affect your credit. You are essentially borrowing from yourself. The loan is not reported as income, therefore it is not taxable (unless the policy is considered a modified endowment contract).

However, the policy will be paid back with interest. The interest rates are typically much lower than on a bank loan or credit card. And there is no mandatory money payment.

You can repay the loan on your own schedule. You aren’t required to repay the loan, but if you don’t, the outstanding amount is deducted from the policy’s death benefit.

It’s still important that you pay back the loan in a timely manner to avoid causing your policy to lapse. If the policy lapses, taxes must be paid on the cash value.

We strongly recommended that you work with a financial professional who can provide careful and thorough analysis of potential legal, tax, and estate implications since withdrawing or borrowing from your retirement plan and life insurance policy may affect your long-term goals.

It is best to review all your options to determine which makes the most sense based on your specific situation.

source 1https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers