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If You Suddenly Need CashPosted by ahc99 on October 26th, 2008

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A recent article in the Money Magazine listed 17 (from best to worst) ways to raise cash. Here is their list:

1. Tap your emergency fund - Best way cause that’s what it’s for. But if you do use it, be sure to save it back up as soon as possible.
2. Sell some investments - They mean the non-retirement investments. Once you sell them, you can lock in the gains and/or write-off the losses. Make sure you sell the ones that are over one year because then you only get hit with 15% capital gains instead of owing ordinary income tax. If you are selling losses, you can write-off $3,000/year and any excess can be carried into subsequent years.
3. Ask the folks for a gift - You won’t get taxed for any gifts and your parents are allowed to give you gifts up $24,000/year (or $12,000/year if just a single parent). Any more than that they will get hit with a gift tax.
4. Bust into a CD early - Good for getting cash immediately; however, you’ll get hit with early-withdrawal penalty that can range from three months interest for CDs less than 18 months to six months interest for CDs greater than two years. The good thing is you get to deduct the penalty on the tax return.
5. Cash in your whole life insurance policy - Actually a good idea cause whole life insurance policies have one of the worst interest rates so you weren’t going to make very much from it anyways. Once you sell it, you can then buy a much cheaper term life insurance policy and save the difference in cost. The only problem is you won’t be able to get any cash out of your whole life policy unless you’ve paid premiums on the policy for more than two years. And even after that, you won’t be able to get much money out of the whole life policy unless you’ve had it for five or more years. Note that you will owe regular income tax on any gains from cashing out the policy.
6. Borrow from family or friends - Besides how difficult this will make your relationship with your family and/or friends, the IRS rules also require you to pay “reasonable” interest on loans above $10,000 (charge no less than 1% below what local banks charge for personal loans). Make sure to get the entire loan down in writing (the amount borrowed, interest rate, and repayment terms), otherwise expect your relationship to implode as it always does when you mix business with pleasure. I’ll be seeing you in family court soon.
7. Take out a home equity line of credit - Also known as a HELOC and these can be hard to get. In order to qualify for one, you generally need a credit score of 680 or better and have at least 20% equity in your house. Fortunately, a HELOC has many positives which justify their difficulty in obtaining one: interest rates average around 5.7%; interest on loans less than $100,000 is tax deductible; and they have low up-front fees.
8. Do a cash-out mortgage refinancing - Fortunately these are easier to get than a HELOC. Unfortunately, they have high taxes and fees, which is generally about 3% on your entire mortgage (not just the cash-out amount). Refis usually allow you to take out up to 90% of house value, but if you borrow more than 80% you will need to pay a PMI (private mortgage insurance).
9. Borrow from your 401(k) or 403(b) plan - The good thing is you can borrow at a low rate from yourself, so that when you pay it back the interest gets paid back to yourself too. But usually this option is not as flexible as some of the others, many retirement plans only let you borrow under certain conditions such as for a first home purchase and medical expenses. In addition, if you do borrow money, you need to start paying it back right away. Also, you can’t borrow as much as some of the other options because you are limited to borrowing 50% of the vested amount. The worst thing about doing this is definitely the loss of potential investment gains.
10. Borrow against other investment accounts - This is usually called a margin loan, in which you borrow against your investments. The interest rates are generally 6% to 7% if you have at least $50,000 of investments. For this option you mainly need to watch out if you trigger a forced sale due to falling assets values.
11. Borrow from strangers - You might be able to get a better rate than a bank loan if you borrow from lending websites such as Prosper.com, LendingClub.com, and Zopa.com. The average rate for borrowers with a score higher than 720 is 9.4%. However, if you have a lower credit score then the accepted interest rate increases as well. For example, if your score is between 600 and 719, you would have paid an average of 16.5% recently; below 600, 35%! In addition, the lending sites charge fees from 0.5% to 2% and cap the amount borrowed to $25,000.
12. Tap your IRA - Again, this option causes you to lose out in potential investment gains. The good thing is if you are younger than 59.5 and have had the IRA for more than five years, you might be able to take a penalty-free withdrawal for certain expenses (home and medical expenses). In addition, there’s another provision in the IRS that allows you to withdraw money from an IRA so long as you roll it over into a new IRA or redeposit it in the same account within 60 days. That provision only allows you to use the 60 day window once a year though. However, if you take advantage of that provision and you don’t pay it back within 60 days, you will get hit with both taxes and the 10% penalty for withdrawing before you are 59.5 years old.
13. Do a reverse mortgage - You can only do this if you are over 62 years old. It is pretty bad though because the amount of equity you are allowed to pull out and use is far less than a traditional mortgage. Adding insult to injury, the younger you are, the less equity you can take out because it will take longer for the loan to be paid back. Also, they usually carry high fees, about three times greater than a traditional mortgage.
14. Sell some hard assets - Too bad they aren’t talking about a yard sale, which is always a good way to both make money and clear junk out of your house. Instead, they are talking about high valued hard assets such as antiques, art, jewelry, and furniture. You can always use an auctioneer to try and sell some of those hard assets. If you decide to do so, watch out for the hefty auctioneer fees that can range from 10% to 20% on sales greater than $10,000. And if you do make a sale, you can also get hit with a large collectible tax of 28% on any gains.
15. Take a cash advance on your credit card - Definitely a bad idea because the interest rates can easily shoot up from 4% to 30% within a couple of months.
16. Liquidate your 401(k) or 403(b) account - The recent 401(k) debit cards sure make this easy to do. Be cautious about doing this if you are younger than 59.5 years old because you will get hit with both ordinary income tax and the 10% penalty. In addition, there might be state taxes on top of that, pushing up the tax to 50% on any amount you take out. And this is not including the effects of the loss of potential investment gains.
17. Go to a payday lender - There are absolutely no benefits in doing this. Annualized interest rates can range from an incredible 200% to 500%!! Don’t do this no matter how desperate you are because there are always other options, like the ones shown above.

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