Fast Access to Your Money

November 20, 2015

Author: Dave Gardner

There are times you need quick access to a significant amount of money. Your finances may be strong overall but your assets may not be easily reached. There are many balance sheet millionaires who would find it challenging to come up with $50,000 cash on short notice. It could be that most of your funds are locked in a 401(k) or another retirement plan. You may have significant home equity or a sizable taxable investment account with capital gains. Perhaps you have a cash value life insurance policy, a 529 plan for education savings, or non-qualified annuity.

Before we dive into these techniques, be aware this topic could be termed financial fission. It’s a potent powerful force for good if harnessed correctly, but could be catastrophic to your finances if misused. Financial behaviorists will be screaming because we’ll be removing the veneer of inaccessibility from sources that you may now consider to be out of reach.

Retirement Plans. Most retirement plans, such as 401(k)s and 403(b)s, offer loans. Many investors like this idea, because they will be paying interest on the loans to their own account. The maximum loan is generally $50,000 depending on its balance and generally is repaid over five years. While this can be a good option for short-term access to cash, studies show if you borrow from your retirement plan, you’re likely to reduce your retirement savings as your scrimp to pay off your debt. Plus those funds you borrow are taken out of the market, so you miss out on potentially superior long-term returns.

Traditional and Roth IRAs. Unlike retirement plans, Traditional IRAs and Roth IRAs have no loan options. You could roll a Traditional IRA into your current 401(k), and then access those funds through a loan as described above. Alternatively, if you just need funds for a short while you can distribute them directly to you. Let’s say you want to access $200,000 out of your Traditional IRA. Instead of performing a direct rollover, you take a so-called 60-day rollover payable to yourself. You then have 60 days to deposit the rollover into another IRA (or indeed the same IRA). During that time you have free access to your funds. They will withhold 10 percent of the proceeds for income tax. You only get those taxes back when you file your return, so this may be a better idea in the last months of the year. Also remember you’ll need to come up with that extra 10 percent to fully redeposit the rollover. One advantage of a Roth IRA is that there is no tax withholding requirement for rollovers distributed to you.

Other sources. Having a no closing cost, low-interest home equity line of credit (HELOC) can be a good option for access to quick cash. If you have a taxable investment account that has large capital gains, you may be reluctant to sell the shares and then pay the taxes to access the funds. You can open a margin account to borrow funds from the brokerage firm without having to sell your investments. The interest rate is usually reasonable and may be tax deductible. Non-qualified annuities may not have tax implications if you withdraw funds unless you have a gain in the account, but you may have to pay costly surrender charges. Same rules apply to a cash value life insurance policy and you could endanger the life insurance coverage so tread carefully. Education savings accounts known as 529 plans, if they have a loss, can be accessed without penalty although you have state income tax recapture rules to worry about.

You can see with each of these sources of cash, there are many caveats and rules that apply to your specific situation. Make sure that you are working with qualified tax and investment advisors, or that you are thoroughly briefed on the implications of these different ways of breaking the piggy bank. You don’t want to make a habit of any of these strategies, but at the right time could really ease a temporary cash squeeze.

About Dave Gardner

David Gardner is a certified financial planner with a practice in Boulder County and can be reached at dave@confluencefa.com and at twitter.com/Dave_CFP.