Liz Weston: 4 pitfalls (and better options)

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If you have more bills than money, the usual advice is to cut costs and generate additional income. But some methods of collecting money can be much more expensive than others. Here are four to avoid, if possible, and what to consider.

BEWARE OF DISRUPTING THE RELEASE PLAN

Most of the money that goes into retirement plans trickles out in the form of difficult withdrawals, cash payments when changing jobs, or unpaid loans. A recent study by the Joint Congressional Committee on Taxation found that annually 22% of contributions from people age 50 and under are withdrawn prematurely, mostly in cash, when people leave work.

But these early payments are usually expensive and may leave you too little money in retirement. You usually have to pay fines and distribution income tax, plus you waive all future deferred tax charges that might make money.

You may have other options. If you are still employed, you can borrow from your 401 (k) or temporarily suspend your retirement 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 withdrawals, you can minimize the damage by removing only what you need and leaving the rest to grow. For example, if you quit your job, you can roll up your 401 (k) balance in the IRA and take only what you need from the IRA. This can prevent cash withdrawals from the entire account.

DON’T MISS HEALTH INSURANCE

You may be healthy now, but you’re just one accident or illness away from catastrophic medical bills.

If you do not have access to health insurance at work, see the Affordable Care Act section of HealthCare.gov. Premiums have been reduced for most people this year, and coverage may be free for many, including those receiving unemployment benefits this year.

An analysis by the independent health think tank KFF found that the number of people eligible for subsidies increased by 20% as a result of the American Rescue Plan Act passed in March, and 4 out of 10 uninsured people will be eligible for subsidies. free or almost complete manual. free plan.

You can also lower your premiums by choosing a high deductible plan. That means you have to pay thousands of dollars out of your pocket if you get sick or injured, but at least you won’t run into five- or six-figure bills that could bankrupt you.

BEWARE OF EXPENSIVE CREDITS

Some of the most expensive ways to borrow are payday loans, car loans, and loans that do not require a credit check. High-value loans make it easy to slip into a debt cycle when you cannot make payments and have to borrow again. Car loans put your vehicle at risk of forfeiture 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 211.org, the clearinghouse for government and charitable resources.

● If you are unable to repay the loan, ask the lender about leniency and other difficulties.

● If you have a credit card, consider getting a cash advance. As a rule, interest rates on them are expressed in two-digit numbers, but on expensive loans, the rate is usually calculated in three-digit numbers.

● If you are employed, you can ask your employer for a payday advance or emergency loan.

Another option if you work: Down payment apps like Earnin, Dave, or Brigit. Be careful, however, because the fees can make these loans as expensive as payday loans and trap you in a similar debt cycle if you start relying on them.

DO NOT Squeeze the IRS

If you are unable to pay your tax bill, it may be tempting not to file your tax return. But refusal to file documents carries much higher fines than non-payment, says CPA Neil Stern, a member of the American Institute of Accountants’ Financial Literacy Commission. In addition, there is no statute of limitations for an audit, if you have not submitted documents. The IRS may come after you years or decades later.

The IRS has payment plans that allow you to pay your bill over time. You can also write off your tax bill from your credit card or consider getting a personal loan to pay off your debt, Stern said.

Ignoring the situation is not an option. The IRS has automated processes that match forms like W-2 and 1099 with tax returns, Stern said, and if something is missing, it can quickly lead to a computer-generated non-compliance or audit notification.

“If you owe and don’t pay, the IRS can seize your bank accounts or withhold your wages and other income until all outstanding taxes, fines and interest have been collected,” Stern says. The IRS can even seize and sell your property.

“The IRS is probably the most powerful and ruthless collection agency you’ve ever come across,” Stern says. “If you have tax arrears, it is best to pay as much as possible as soon as possible.”

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This column was provided by the Associated Press personal finance site NerdWallet. Liz Weston, columnist for NerdWallet, Certified Financial Planner and author of Your Credit Score. Email: lweston@nerdwallet.com. Twitter: @lizweston.

TOPIC LINKS:

NerdWallet: withdrawing 401 (k): how much an early 401 (k) withdrawal actually costs https://bit.ly/nerdwallet-401k-withdrawal

HealthCare.gov: insurance coverage https://www.healthcare.gov/get-coverage/

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