Liz Weston: 4 Financing Pit (and Better Options)

If you have more invoices than money, the usual advice is to reduce expenses and find additional income. However, some methods of raising cash can be much more expensive than others. Here are four things to avoid if possible and points to consider instead.

Beware of retirement plan attacks

Most of the severance pay leaks out as difficult withdrawals, cash outs while changing jobs, or unpaid loans. According to a recent survey by the Joint Parliamentary Committee on Taxation, 22% of donations by people under the age of 50 are prematurely withdrawn each year, most of which is cash out when people quit their jobs.

However, these premature withdrawals are usually costly and retirement money can be too low. You usually have to pay a penalty and income tax on the distribution. In addition, we waive all future tax deferred compound interest that could have made money.

There may be other options. If you’re still employed, you can either borrow from a 401 (k) or temporarily suspend your retirement plan contributions to free your money. If you have a Roth IRA, you can withdraw the same amount as your donation without paying any taxes or penalties.

If costly withdrawals are unavoidable, you can minimize the damage by taking only what you need and growing the rest. For example, if you want to quit your job, you can roll your 401 (k) balance into an IRA and get only what you need from the IRA. This eliminates the need to monetize your entire account.

Do not skip health insurance

You may be healthy now, but you are the only bad accident or illness away from catastrophic medical costs.

If you are unable to get health insurance through your work, check for an Affordable Care Act replacement. Most people’s premiums have been reduced this year, and many are free to get insurance, including those who receive unemployment benefits this year.

According to an analysis by the nonpartisan healthcare think tank KFF, the U.S. Rescue Planning Act passed in March increased the number of people eligible for grants by 20%, and four out of ten uninsured people are free. Or it turned out to be almost the target. Free plan.

You can also lower your insurance premiums by choosing a high deduction plan. That means paying thousands of dollars out of your pocket if you get sick or injured, but at least you won’t face a five- or six-digit bill that could go bankrupt.

Beware of high-value loans

Some of the most expensive ways to borrow are payday loans, car title loans, and loans that do not require a credit check. High-value loans are prone to a debt cycle where you can’t pay and are forced to borrow again. Car title loans put your car at risk of being confiscated due to delinquency.

These options may not be as quick or convenient, but they are often better for your financial health:

● If you need help paying your bill, start by checking the government and charity information center

● If you can’t pay the loan, ask the lender for patience and other difficult options.

● If you have a credit card, please consider cash advance services. These usually incur double-digit interest rates, while high-value loans usually incur three-digit interest rates.

● If you are employed, you can ask your employer to prepaid your salary or make an emergency loan.

Another option if you are hired: Payday Advance apps such as Earnin, Dave, Brigit. However, be aware that fees can make these loans as expensive as payday loans, and becoming dependent on them can lead to a similar debt cycle.

Do not harden the IRS

If you can’t pay the tax, you may not want to file a tax return. However, failure to submit will result in far higher penalties than failure to pay, said CPA Neil Stern, a member of the Financial Literacy Commission of the American Institute of Certified Public Accountants. In addition, there is no statute of limitations regarding audits in the event of a failed submission. The IRS can come after you years or even decades later.

The IRS has a payment plan that allows you to pay invoices over time. You can also charge taxes on your credit card or consider using a personal loan to pay what you owe, Stern said.

Ignoring the situation is not the solution. The IRS has an automated process that matches forms such as W-2 and 1099 to tax returns, and a lack of something can quickly lead to computer-generated mismatch notifications or audits. Stern says there is.

If you owe and don’t pay, the IRS can seize your bank account or decorate your wages and other income until all unpaid taxes, fines and interest are collected, Stern said. say. The IRS can even seize and sell your property.

“The IRS is probably the most powerful and relentless collection agency you can meet,” says Stern. “If you are obliged to pay taxes, you should pay as much as you can as soon as possible.”

File-This dateless file photo provided by NerdWallet shows Liz Weston, a columnist on a personal finance website. (NerdWallet via AP, file) {Pull from column 7.12.21}

This column was provided to The Associated Press from the Personal Finance website. NerdWallet.. Contact Liz Weston, a certified financial planner and columnist at Nerd Wallet. also @lizweston..

Liz Weston: 4 Financing Pit (and Better Options)

Source link Liz Weston: 4 Financing Pit (and Better Options)

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