Cash Crunch? Here Are 4 Tax-Friendly Ways to Get Cash Quickly!

Finding yourself in a short-term cash crunch can be stressful, especially when you need funds quickly without triggering a large taxable event. Whether it’s for a down payment on a home or another financial need, there are strategies available to help you access cash while minimizing tax implications. In this article, we’ll explore four tax-friendly ways to get cash quickly that could make a difference in managing your finances.

1. Home Equity Line of Credit (HELOC)

If you’re a homeowner with equity in your property, a HELOC can be a practical solution. A HELOC allows you to borrow against the equity in your home, providing access to cash without having to sell investments or assets.

For example, if your home is valued at $1 million and you have $500,000 in equity, you can secure a HELOC for a portion of that equity. Lenders typically consider up to 85% of your home’s value when evaluating your loan application, which may assist in managing your financial situation. Once your cash crunch resolves, such as when you sell a current property, you can pay off the HELOC to avoid ongoing interest costs.

2. Non-Purpose Margin Loan

If you have a taxable investment account, a non-purpose margin loan may allow you to borrow against the value of your portfolio without selling investments. Most custodians permit loans of up to 50% of your portfolio’s value.

For instance, if you have $2 million in investments, you could potentially borrow $225,000 to cover your short-term needs. However, it’s important to manage this carefully—market fluctuations can trigger margin calls, forcing you to sell investments at an inopportune time. Be sure to repay the margin loan promptly once your financial situation improves.

SEE ALSO: Setting Financial Goals for the New Year: A Comprehensive Guide

3. Intra-Family Loan

If you have a family member who is willing to lend you money, an intra-family loan can be a tax-efficient option. To avoid the loan being classified as a gift by the IRS, it should be structured with a formal agreement and adhere to the applicable federal rate (AFR).

For example, you could borrow $225,000 from a wealthy relative for a short term, agreeing to pay interest at 110% or 120% of the AFR to avoid gift tax complications. An attorney and CPA can help draft the loan agreement to ensure compliance and provide both parties with peace of mind.

4. IRA Rollover Withdrawal

The IRS allows for one rollover withdrawal per year from an IRA, offering a temporary way to access cash. Here’s how it works:

• Withdraw the amount you need from your IRA, such as $225,000.

• Repay the amount within 60 days to avoid taxes or penalties.

This strategy requires precise timing and careful coordination with your CPA. If you miss the 60-day deadline, the withdrawal will be treated as taxable income, and if you’re under 59½, penalties may also apply.

SEE ALSO: Planning for Early Retirement: Accelerated Savings and Investment Goals

Important Considerations

While these tax-friendly ways to get cash quickly can provide short-term solutions, they each come with specific risks and requirements:

• Work with Professionals: Collaborate with your CPA or financial advisor to ensure strategies are implemented correctly.

• Understand Deadlines: Missing deadlines, such as the 60-day IRA repayment rule, can result in unexpected taxes and penalties.

• Weigh Costs and Benefits: Consider the interest costs or potential risks associated with each method.

Final Thoughts

Managing a short-term cash crunch doesn’t have to derail your financial plans. By using strategies like HELOCs, margin loans, intra-family loans, or IRA rollovers, you can access the funds you need, but it’s important to understand the potential tax implications.

If you’d like guidance on which option might work best for your situation, Paces Ferry Wealth Advisors is here to help. Contact us today to discuss your financial needs and explore solutions that align with your goals. 

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.