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We can’t always be prepared for emergencies or unforeseen circumstances. The idea of finding cash can be stressful which often leads to costly mistakes if actions are taken without considering all your options. Below is a guide you should consider if you are strapped for cash:
Cash Distribution Guide
Emergency checking or savings accounts: If you have a 3 – 6 months of expenses in cash, you should use these funds first, and replenish as soon as possible once you get back on your feet.
Interest free credit card (if available): Only use this option if you can pay off the balance quickly to avoid high interest (often 25%+). Otherwise, skip it to prevent ballooning debt.
Taxable brokerage accounts (crypto, stocks, etc.): Emergencies happen and sometimes you have to take money off the table. The opportunity cost here is giving up potential after-tax upside.
Penalty free withdrawal from retirement plan or account: If exception applies , 10% penalty can be avoided on early distributions. However, you will still be subject to income taxes (fed, state, and/or local).
Low-interest loans: Eligibility depends on your credit and assets. Homeowners may qualify for a HELOC, while those with strong credit may access personal loans through banks or credit card providers.
401(k) loan: While not ideal, this approach is better than incurring high-interest debt such as credit cards. Each plan will have their own rules so its important to consult the terms with your provider.
Premature withdrawal from an IRA: Withdrawals will be subject to income tax withholding. Furthermore, penalties will apply if exceptions are not met. Note, unlike 401(k)’s, IRA’s don’t permit loans.
401(k) hardship withdrawal: May qualify if facing immediate and heavy financial need. However, your employer determines if you qualify; you are still subject to income taxes; and future contributions may be limited.
If your emergency involves medical expenses, consider using funds from your HSA or FSA first, since these accounts are specifically designed for qualified medical costs and offer valuable tax advantages.
Conclusion
Navigating financial emergencies is tough, but knowing your options can prevent costly mistakes. If you’re unsure which step is right for you, reach out to Royal Financial for personalized guidance.
Disclaimer: The information provided herein is intended solely for informational purposes and no person(s) or other third-party may rely upon it as financial, tax, or legal advice or use it for any other purposes. As a result, Royal Financial, and any affiliates, assume no responsibility whatsoever to readers, or any other persons for that matter, as a result of the information contained herein.