October 10, 2017 in Insurance

7 places to find cash after a disaster

When nature goes wild, it can be disastrous for your finances. According to the National Climatic Data Center, major weather disasters have caused more than $1.2 trillion worth of damage in the U.S. since 1980 — and that doesn’t include Hurricanes Harvey, Irma, Maria or Nate.

If you’re hit with an emergency and need to find cash fast, tap into the emergency reserves in your savings account. Then look to these resources.

1. Family and friends

If you need to find cash fast, ask loved ones first, says Pamela Yellen, author of “Bank On Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future.”

“Never ever treat (a family loan) casually,” she says. “Put it in writing. Assign a fair interest rate to it. … Treat it like any other business relationship.”

While your family lender doesn’t have to charge the full market interest rate, they have to charge you something for the transaction to be considered a loan and not a gift that could have tax and estate planning implications.

The government publishes a monthly list of applicable federal rates, or AFRs, that provide minimum interest rates on loans made between family and friends.

If your loved ones aren’t in the black right now, peer-to-peer lending sites can connect you with wealthy strangers.

2. The feds

In gravely disastrous times, Uncle Sam might also help.

The Federal Emergency Management Agency provides disaster assistance for temporary housing, home repair, disaster-related medical and burial expenses, vehicle damage and cleanup costs, while the U.S. Small Business Administration offers federally subsidized loans for renters, private nonprofit organizations and home and business owners.

To qualify for either, borrowers must live in a federally declared disaster zone and file a claim with their insurance company first.

3. Your life insurance policy

Permanent life insurance policies are excellent emergency resources because they’re accessible, you can borrow against them without having to qualify for a loan, and you can pay a policy loan back on your own schedule.

“You can borrow up to about 90 percent of the cash value of the policy. There are no immediate income tax consequences unless the loan isn’t repaid,” says Roland Jones, a CFP professional with Moneta Group, a financial services firm in Clayton, Missouri.

Though rules vary among insurance providers, many require policyholders to own their policies for a few years before borrowing. You’ll also be charged interest for taking out a policy loan, which will be deducted from the death benefit until you pay the loan back.

Just don’t borrow too much. Should the loan and accumulated interest become greater than the surrender value of the policy, policyholders could find themselves having to pay significant premiums to keep the policy in force.

4. CDs, savings bonds and mutual funds

You can take your money out of a CD, but you’ll probably pay a penalty. It could be just a few months’ interest, but check with your bank first.

Sacrificing some CD earnings is a pittance compared to paying interest rates on a life insurance loan or cash advance.

Savings bonds are another quick cash resource, though you could pay a three-month interest penalty if a bond is redeemed too early, reports the U.S. Treasury. In both cases, you’ll pay income tax on any interest earned.

Of course, you can sell stocks (and realize a capital gain or loss accordingly) as well as mutual funds and annuities. If you take this route, consult a financial adviser about tax issues and penalties.

5. 529 college savings

If you have to borrow from your future to pay present obligations, so be it.

According to the Securities and Exchange Commission, college savers who pull funds out of a 529 plan for non-qualified education expenses will pay income tax and a 10 percent penalty on earnings.

Those investing in plans that offer state tax incentives may have state tax consequences, too.

6. Retirement accounts

Roth IRA holders may withdraw their own contributions — not earnings — without tax or penalty.

Traditional IRA holders may start taking penalty-free distributions on their accounts if they begin taking regular distributions, but specific rules apply. You’ll pay income taxes and a 10 percent penalty on the taxable amount if you’re under age 59½.

Since taking early IRA distributions can severely disrupt your future retirement plans, “You wouldn’t do that unless it was the only option,” says Kirk Shamberger, a partner with CK Financial Resources in Colchester, Vermont.

7. A loan from your 401(k)

With 529 plans and IRAs, the problem is time. Regardless of whether you get around the tax and penalty rules, pulling funds early limits the compound interest you can potentially gain from them in the future.

A 401(k) loan is usually a better option.

The IRS reports that 401(k) holders can borrow up to half of their account balance (a maximum of $50,000) tax-free, but funds must be repaid within five years in most cases.

The catch is that you have to stay with your current employer for the duration.  If you lose your job, you’ll have 30 to 60 days to repay the loan or face penalties.

Before pulling funds from any long-term investment, read the fine print and consult your tax adviser.