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Got Cash? Which Investments to Tap When You Need Money

Barbara Marquand | guest writer for GoTalkMoney

Whether you're hit with an unexpected medical bill or need money to pay the mortgage after losing your job, there may come a time when you have to tap your emergency savings and investments to get the cash you need, especially in today's tough economy.

Here are options to consider when you're hard up for quick cash:

• Savings Account

This is your most liquid investment and should be the first place you turn. Sure, you lose opportunity to earn interest but with savings account rates at paltry levels, you're not sacrificing all that much.

• Money Market Account

You're next stop is your money market account or money market fund. Beware that a heavy withdrawal could trigger a fee if you draw your balance below the minimum requirement for your account. Money market rates are usually higher than conventional savings account rates, yet in today's environment they're still low enough that you're not giving up a lot of interest earnings to get the cash you need.

• CDs

Check whether any of your CDs are close to maturity. Chances are good that a certificate of deposit will mature soon if you've set up a strategic CD ladder. A CD ladder features multiple CDs with staggered maturity dates to provide steady access to cash. You lose three months of interest earnings if you cash in a traditional CD before the maturity date, unless it's a no-penalty CD, which lets you cash in early without paying a price. More exotic CDs, such as long-term indexed CDs, are less liquid -- you forfeit principle as well as interest if you cash them in before maturity. Make these your last resort if you plan to raid CD investments.

• Savings Bonds

Savings bonds earn interest for up to 30 years, but they can be cashed in long before then. You must hold savings bonds for at least a year, and you pay a three-month earnings penalty if you cash them in before five years.

• 401(k) loan

Federal law lets you borrow up to $50,000 or half of your 401(k) account balance, whichever is less, if your plan allows loans. A loan is a better option than an early withdrawal. You pay income tax plus a 10 percent tax penalty on a withdrawal if you're under 59 1/2. You pay no tax penalty for taking out a loan. Still, there are some tax consequences. You repay the loan plus interest with after-tax money. Then when you're retired, you pay taxes again on that amount when you withdraw, so in essence the money gets taxed twice. In most cases you must repay the loan within five years on an amortizing basis. You don't have to undergo a credit check or explain how you plan to use the money when you borrow from your 401(k), making it an attractive alternative to a bank loan. (You can't borrow from an IRA.)

• Other Investments

Other investments, such as stock and real estate, are possibilities, but you may not get the price you want if you have to sell quickly, and in the tough real estate market, you might not be able to unload property in a timely manner, period.

• Home equity loan

Got equity? Count yourself among the lucky ones who aren't underwater on their mortgages. Interest rates on home equity loans are low these days, and in many cases you get a tax deduction from interest paid on home equity loans, but approach with caution. You could lose your home if you default.

Meanwhile, avoid getting in deep with credit cards, which carry high interest rates for purchases and even higher rates and fees for cash advances.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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