If you’ve got more bills than money, the usual advice is to trim expenses and find additional income. But some ways of raising cash can be a lot more expensive than others. Here are four that should be avoided, if possible, and what to consider instead.
BEWARE RAIDING A RETIREMENT PLAN
A big chunk of the money contributed to retirement plans leaks out as hardship withdrawals, cash-outs during job changes or loans that aren’t repaid. A recent study for the Congressional Joint Committee on Taxation estimated that every year 22% of the contributions made by people aged 50 or younger is prematurely withdrawn, mostly in cash-outs as people leave jobs.
But these premature withdrawals are usually expensive and can leave you with too little money in retirement. You typically must pay penalties and income taxes on the distributions, plus you give up all the future tax-deferred compounding that money could have earned.
You may have other options. If you’re still employed, you could borrow from your 401(k) or halt retirement plan contributions temporarily to free up money. If you have a Roth IRA, you can withdraw an amount equal to your contributions without owing taxes or penalties.
If you can’t avoid a costly withdrawal, you can minimize the damage by taking out only what you need and leaving the rest to grow. For example, if you’re leaving your job you could roll your 401(k) balance into an IRA and take only what you need from the IRA. That could prevent having to cash out the whole account.
DON’T SKIP HEALTH INSURANCE
You may be healthy now, but you’re just one bad accident or illness away from catastrophic medical bills.
If you don’t have access to health insurance through work, check the Affordable Care Act exchanges at HealthCare.gov. Premiums have been lowered for most people this year, and coverage can be free for many, including people who get unemployment benefits this year.
An analysis by the nonpartisan health care think tank KFF found that the number of people who qualify for subsidies increased 20% as a result of the American Rescue Plan Act passed in March, and 4 out of 10 uninsured people would qualify for a free or nearly free plan.
You also can lower premiums by opting for a high-deductible plan. That means paying thousands of dollars out of pocket if you get sick or injured, but at least you won’t face the kind of five- or six-figure bills that could bankrupt you.
BEWARE HIGH-COST LOANS
Among the most expensive ways to borrow are payday loans, car title loans and loans that don’t require a credit check. High-cost loans make it easy to slip into a cycle of debt, where you can’t make the payments and are forced to borrow again. Car title loans put your vehicle at risk of being seized for nonpayment.
These alternatives may not be as quick or convenient, but they’re often better for your financial health:
• If you need help paying bills, start by checking 211.org, a clearinghouse of government and charitable resources.
• If you can’t pay a loan, ask the lender about forbearance and other hardship options.
• If you have a credit card, consider a cash advance. These typically incur double-digit interest rates, but high-cost loans typically have triple-digit rates.
• If you’re employed, you can ask your employer for a paycheck advance or emergency loan.
Another option if you’re employed: payday advance apps such as Earnin, Dave or Brigit. Be careful, however, because the fees can make these loans as expensive as payday loans, and trap you in a similar cycle of debt if you come to rely on them.
DON’T STIFF THE IRS
If you can’t pay your tax bill, it can be tempting not to file a return. But failing to file carries much higher penalties than failing to pay, says CPA Neal Stern, a member of the American Institute of CPAs’ Financial Literacy Commission. In addition, there is no statute of limitations on audits when you fail to file. The IRS can come after you years or decades later.
The IRS has payment plans that allow you to pay your bill over time. You also could charge a tax bill to a credit card or consider getting a personal loan to pay what you owe, Stern says.
Ignoring the situation is no solution. The IRS has automated processes that match up forms like W-2 and 1099 to tax returns, and if something is missing it can quickly result in a computer-generated discrepancy notice or an audit, Stern says.
If you owe and don’t pay, the IRS can seize your bank accounts or garnish your wages and other income until all of the unpaid taxes, penalties and interest are collected, Stern says. The IRS can even seize and sell your property.
“The IRS is probably the most powerful and relentless collection agency you can ever encounter,” Stern says. “If you owe taxes, it’s better to pay as much as you can, as soon as you can.”