Cash withdrawal If your client is in a cash crunch, here are some options that may be available to them. (Photo: Shutterstock)

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.

The act also allows people to take loans from 401(k)s with an expanded limit — the lesser of $100,000 or the vested balance — and gives them up to five years to repay the loan.

But should retirement savers do this? Just because the CARES Act makes these options available, “whether you should take advantage of it or not is highly individualized,” Bruno says.

Make sure your clients understand the implications: Withdrawing money from retirement accounts subjects the withdrawal to income taxes; they’re also forgoing compounding all the withdrawn dollars.

Consider how much money a client would leave on the table by taking a $10,000 withdrawal from their 401(k), for example. Assuming a hypothetical 6% annual return over 30 years, that comes to $57,000.

Bruno says that before withdrawing from a retirement account, investors should consider whether they have other liquid assets to tap instead. But if it comes down to retirement account distributions versus high-interest credit cards, the former may be preferable.

3. Health Savings Accounts

Health savings accounts are set up to pay for health care. “Ideally, if you can pay out of pocket, that’s the best thing to do because then the account continues to grow tax-advantaged, but health savings accounts obviously are one way to meet health care expenses,” Bruno says.

But HSAs have lots of flexibility, “so you can really treat them as a retirement vehicle and, depending upon the investment options, invest accordingly,” Bruno says.

Not only that, account holders who pay for health care out of pocket and keep the receipts can use those receipts later to withdraw money from the account.

“And obviously, you’re not using it to fund that specific health care cost because you incurred that potentially years before,” Bruno says. “So I guess the point there is that the health care cost doesn’t necessarily have to be incurred in that year.”

— Related on ThinkAdvisor: