If you have more bills than you have money, the usual advice is to cut expenses and find some extra income. But some ways to raise money can be much more expensive than others. Here are four that should be avoided, if possible, and what to consider instead.
Beware of pillaging a pension plan
Much of the money that goes into pension plans goes in the form of hardship withdrawals, withdrawals for job changes, or loans that go unpaid. A recent study for the Congressional Joint Committee on Taxation estimated that every year 22% of contributions made by people aged 50 and under are withdrawn prematurely, mostly in the form of withdrawals when people leave their jobs.
But these premature withdrawals are generally expensive and may leave you with too little money in retirement. You generally have to pay penalties and income taxes on the distributions, and you forgo any future tax-deferred compound that that money might have earned.
You may have other options. If you’re still employed, you can borrow on your 401 (k) or temporarily suspend contributions to the pension plan to free up money. If you have a Roth IRA, you can withdraw an amount equal to your contributions without having to pay taxes or penalties.
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If you can’t avoid an expensive removal, you can minimize the damage by removing only what you need and allowing the rest to grow. For example, if you quit your job, you can transfer your 401 (k) balance to an IRA and only take what you need from the IRA. This could avoid having to cash the whole account.
Don’t skip health insurance
You might be healthy now, but you’re just a serious accident or illness from catastrophic medical bills.
If you don’t have access to health insurance through work, check out the Affordable Care Act exchanges on HealthCare.gov. Premiums have been reduced for most people this year, and coverage can be free for many, including people receiving unemployment benefits this year.
Analysis by the non-partisan healthcare think tank KFF found that the number of people eligible for grants increased by 20% following the American Rescue Plan Act passed in March, and 4 in 10 uninsured people would be entitled to a free or almost. free package.
You can also reduce your 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.
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Watch out for expensive loans
Among the most expensive means of borrowing are payday loans, auto title loans, and loans that do not require a credit check. High cost loans make it easy to slip into a cycle of debt, where you can’t make payments and are forced to borrow again. Auto title loans put your vehicle at risk of being foreclosed on for non-payment.
These alternatives might not be as quick or convenient, but they are often better for your financial health:
If you need help paying your bills, start by visiting 211.org, a clearinghouse for government and charitable resources.
If you can’t repay a loan, check with the lender about forbearance and other options if you’re having trouble.
If you have a credit card, consider a cash advance. These usually result in double-digit interest rates, but high cost loans usually have triple-digit rates.
If you have a job, you can ask your employer for a payday advance or an emergency loan.
Another option if you are employed: payday advance apps like Earnin, Dave or Brigit. Be careful, however, as the fees can make these loans as expensive as payday loans, and trap you in a similar debt cycle if you come to rely on them.
Don’t stiffen up the IRS
If you can’t pay your tax bill, it might be tempting not to file a return. But not filing a case carries much higher penalties than failure to pay, says CPA Neal Stern, a member of the Financial Literacy Commission of the American CPA Institute. Also, there is no limitation period on audits when you fail to file. The IRS can come after you years or decades later.
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The IRS has payment plans that allow you to pay your bill over time. You can also charge a tax bill on a credit card or consider getting a personal loan to pay off what you owe, Stern says.
Ignoring the situation is not a solution. The IRS has automated processes that match forms like W-2 and 1099 to tax returns, and if anything is missing, it can quickly lead to a computer-generated discrepancy notice or audit, Stern says.
If you owe and don’t pay, the IRS can seize your bank accounts or seize your wages and other income until all unpaid taxes, penalties and interest are collected, Stern says. The IRS can even seize and sell your property.
âThe IRS is probably the most powerful and relentless collection agency you can meet,â Stern said. âIf you owe taxes, you better pay as much as you can, as soon as you can. “
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Liz Weston writes for NerdWallet. Email: [email protected] Twitter: @lizweston.