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August 13, 2020 at 03:32 PM
Many people have found themselves in a cash crunch over the past five months as the coronavirus lockdown wreaked havoc on the U.S. economy.
At present, more Americans are seeking unemployment benefits each week than at the highest point following the 2008 financial crisis, Bloomberg reported Thursday.
Christine Benz, Morningstar’s director of personal finance, recently asked Maria Bruno of Vanguard to discuss strategies to consider for those who find themselves in a financial predicament.
Bruno, a certified financial planner, leads Vanguard’s U.S. wealth planning research at Vanguard.
1. Emergency Fund
“We always counsel people to have that emergency fund in place,” Bruno says. But they should think about this in terms of spending shocks versus income shocks, she says.
A spending shock is an unforeseen expense for which Vanguard recommends having between two weeks and up to three months’ worth of expenses in a cash-type account.
An income shock would result, say, from loss of a job. Here, people should think of other types of accounts that can be tapped to meet expenses. Roth IRAs, for one, can be accessed without incurring penalties or an income tax bill.
Nonretirement brokerage accounts are another option. Bruno says investors should be mindful in tapping these accounts to be as tax-efficient as possible when making any transactions, perhaps by looking for any types of losses or trying to minimize capital gains.
2. Retirement Account Withdrawals
The Coronavirus Aid, Relief and Economic Security (CARES) Act opened up additional opportunities for individuals affected by the coronavirus who want to tap into their retirement assets to meet emergency funding needs.
Those younger than 59 1/2 can access their employer-sponsored plan or IRA up to $100,000 absent the usual 10% early withdrawal penalty, and can spread out the tax liability over three years.
