If you have more bills than money, the usual advice is to reduce expenses and find additional income. But some ways of raising funds can be much more expensive than others. Here are four that should be avoided, if possible, and what to consider instead.
Beware of Raids on a Pension Plan
Much of the money paid into pension plans drains away in the form of hardship withdrawals, cash withdrawals when jobs change, or defaulted loans. A recent study for the Congressional Joint Committee on Taxation estimated that each year 22% of contributions made by people age 50 or younger are withdrawn prematurely, mostly in the form of withdrawals when people leave their jobs.
But these premature withdrawals are usually expensive and may leave you with too little money in retirement. You usually have to pay penalties and taxes on distributions, and you forfeit any future tax-deferred compound interest that money might have earned.
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You may have other options. If you’re still employed, you can borrow from your 401(k) or temporarily suspend retirement plan contributions to free up money. If you have a Roth IRA, you can withdraw an amount equal to your contributions without paying taxes or penalties.
If you can’t avoid costly removal, you can minimize the damage by removing only what you need and letting the rest grow. For example, if you quit your job, you can transfer your 401(k) balance to an IRA and only withdraw what you need from the IRA. This could avoid having to cash out the entire account.
Don’t Skip Health Insurance
You may be healthy now, but you are only one serious accident or illness away from catastrophic medical bills.
If you don’t have access to health insurance through work, check out the Affordable Care Act exchanges at HealthCare.gov. Premiums have been reduced for most people this year and coverage may be free for many, including people receiving unemployment benefits this year.
Analysis by nonpartisan healthcare think tank KFF found the number of people eligible for subsidies increased by 20% following the American Rescue Plan Act passed in March, and 4 in 10 uninsured people would be eligible for a free or nearly free plan.
You can also reduce 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 be faced with the kind of five- or six-figure bills that could put you out of business.
Beware of high cost loans
Among the most expensive means of borrowing are payday loans, car 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 the payments and are forced to borrow again. Car title loans put your vehicle at risk of being seized for non-payment.
These alternatives may not be as quick or convenient, but they are often better for your financial health:
- If you need help paying your bills, start by checking out 211.orga clearinghouse for government and charitable resources.
- If you cannot repay a loan, ask the lender about forbearance and other hardship options.
- If you have a credit card, consider a cash advance. These typically carry double-digit interest rates, but high-cost loans typically have triple-digit rates.
- If you are employed, you can ask your employer for a payday advance or an emergency loan.
Another option if you are an employee: payday advance apps like Earnin, Dave or Brigit. Be careful, though, because the fees can make these loans as expensive as payday loans and lock you into a similar debt cycle if you come to rely on them.
Don’t stiffen the IRS
If you can’t pay your tax bill, it may be tempting not to file a return. But failing to file carries far greater penalties than failing to pay, says CPA Neal Stern, a member of the Financial Literacy Commission of the American Institute of CPAs. Also, there is no statute of limitations for audits when you fail to file. The IRS can sue you years or decades later.
The IRS has payment plans that allow you to pay your bill over time. You can also 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 not a solution. The IRS has automated processes that match forms such as W-2 and 1099 with tax returns, and if anything is missing, it can quickly result in a computer-generated notice of discrepancy or audit, Stern says.
If you owe and don’t pay, the IRS can garnish 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.
“The IRS is probably the most powerful and relentless collection agency you will ever encounter,” Stern says. “If you owe taxes, it’s better to pay as much as you can, as soon as you can.”
This article was written by NerdWallet and was originally published by Associated Press.