10 Tax-Free Ways to Get Cash Without Tapping Your Retirement Savings
10 Tax-Free Ways to Get Cash Without Tapping Your Retirement Savings – Need cash fast? Discover 10 tax-free alternatives to withdrawing from your retirement accounts, including using your HSA, exploring margin loans, and leveraging home equity.
While the holiday season often brings joy, celebrations, and plenty of gift-giving, January can feel like a buzzkill when the bills roll in. You’re not alone if you’re ringing in the new year wondering how to pay off your debts. A recent survey from LendingTree showed that more than a third of American consumers took on holiday debt, which averaged about $1,181. Your budget might have taken an even bigger hit if you also encountered another unexpected expense, such as a health-related cost or car trouble. That may be why paying down debt is the top financial resolution for 2025.
Withdrawing from an IRA or an individual, joint, or trust account may solve your immediate cash problem, but it can also increase your taxable income and lead to a larger tax bill. Depending on the expenses you incurred, you may have other options to consider, such as these 10 potentially tax-free alternatives:
1. Your Health Savings Account as a Source of Emergency Funds
You may fund a health savings account (HSA) with a high-deductible health insurance policy. Contributions to an HSA are tax-deductible, and the account’s investment income grows tax-free. Distributions for qualified medical expenses are also tax-free.
Some individuals cover medical expenses out of pocket, allowing their HSA to grow tax-free. If you’ve diligently kept records of your qualified medical expenses, you can reimburse yourself—even years after the expense was incurred—as long as you have appropriate documentation. A distribution from your HSA remains tax-free when supported by the proper proof.
2. Your IRA as a Source of Short-Term Tax-Free Cash
You can take a distribution from your IRA and avoid taxable income if you replace the funds within 60 calendar days. For example, if you need a down payment for a new home before selling your existing home, you could take a short-term distribution from your IRA. Once your old house sells within 60 days, you can return the funds to your IRA and avoid the taxes.
If the home doesn’t sell in time, other options may exist to replace the funds. A spouse/friend could take a distribution from their IRA and use it to replace your withdrawal, effectively resetting the 60-day clock. However, each taxpayer can only perform this rollover once within 12 months. If the funds are not replaced within the allowed time, they become taxable, and if the IRA owner is younger than 59 1/2 years, the distribution is subject to a 10% penalty. A last resort option may be asking family members to lend funds to replace the distribution within the 60-day limit, expecting you’ll pay them back when the home sells. Consider the risks when using IRA distributions for short-term liquidity.
3. Margin Loans as a Source of Tax-Free Cash
If you have a taxable investment account, you can borrow up to half its value through a margin loan and use it for any purpose. The account secures the loan, and there is no fixed repayment schedule.
While margin loans offer flexibility, they come with certain risks. One key risk is that interest rates on margin loans may be higher than those offered by banks, and these rates can fluctuate over time while the loan is outstanding. Additionally, you may face a margin call if the value of your account falls below the required maintenance margin. In such cases, you must deposit additional funds or sell assets in the account to restore the required margin level. Selling assets during a market downturn is often not ideal.
Despite these risks, margin loans have some notable benefits. The underwriting and administrative process is typically straightforward, making them an accessible option. Moreover, dividends, interest and deposits credited to the account can help reduce the loan balance over time. This feature, combined with the tax-free access to cash, can make margin loans an attractive option for short-term liquidity needs.
4. Home Equity Line of Credit (HELOC)
Establishing a home equity line of credit (HELOC) can provide a ready source of cash, even if you don’t have an immediate need. While a HELOC may give a lump sum for various purposes, it comes with risks you should consider. The variable interest rates can increase over time, making it hard to budget for this expense. Borrowing too much against your home can leave you vulnerable if property values decline. It can be an expensive option because, typically, there are upfront costs, including application, appraisal and other fees. Once you’ve carefully assessed all of these factors related to your financial situation, a HELOC could be a practical solution for quickly accessing funds.
5. Existing Life Insurance Policies with Cash Value
Older life insurance policies with cash value can serve as a source of tax-free cash. Rather than surrendering the policy, which might trigger undesirable tax consequences, you could exchange it for another policy that maintains a death benefit while allowing you to use the cash value for tax-free spending purposes. Be cautious: If the policy lapses before the insured dies, outstanding loans become taxable income. Additionally, when the insured passes, the beneficiary receives the death benefit less any cumulative amounts spent.
6. Municipal Bonds (Muni Bonds)
The interest earned on these bonds is generally exempt from federal income tax and, in many cases, from state and local taxes if you reside in the issuing state. This tax-free income makes muni bonds an attractive option for investors seeking steady, reliable cash flow. While muni bonds typically offer lower yields compared to taxable bonds, their tax-exempt status can provide higher effective returns for individuals in higher tax brackets. However, evaluating the issuer’s creditworthiness and understanding the associated risks is essential.
7. Strategic Liquidation of Investments
When selling investments, the portion of the proceeds that reflects the original investment amount (cost basis) is not subject to taxation. Even if the sale generates a gain, it may be possible to offset the gains by strategically harvesting losses during market downturns. If you decide to liquidate investments in a taxable account, prioritize those held for more than a year to qualify for long-term capital gains treatment. Gains classified as long-term are taxed at preferential rates, making this strategy potentially more tax-efficient.
8. Gifts
Gifts can be a valuable source of tax-free income, provided they adhere to the Internal Revenue Service (IRS) guidelines. The IRS allows individuals to gift a specific amount each year to multiple recipients without incurring gift tax or affecting their lifetime estate and gift tax exemption. For 2025, this annual exclusion amount is set at $19,000 per recipient.
- Gifts from individuals: In 2025, an individual can gift up to $19,000 to as many people as they wish without triggering gift tax reporting requirements.
- Gifts from married couples: Spouses can combine their exclusions, allowing a married couple to gift up to $38,000 per recipient in 2025 without incurring gift tax.
Extremely generous gift-givers can make payments on your behalf to educational institutions and medical providers, exceeding the annual exclusion, and remain compliant with IRS guidelines.
9. Proceeds from Selling Goods
If you sell used personal items (e.g., furniture, clothes, electronics) for less than their original purchase price, the income is generally not taxable. If you sell on a platform like Facebook Marketplace/eBay, and your gross proceeds exceed $600 in a calendar year, you may receive Form 1099-K for tax reporting purposes. If gross income exceeds $600, you are responsible for reporting net profits even if you don’t receive a 1099-K reporting the sales proceeds.
10. Roth IRAs
While tapping into Roth individual retirement accounts (IRAs) should generally be a last resort due to the significant benefits of allowing them to grow tax-free over time, they can serve as a valuable source of tax-free cash flow. Contributions are made with after-tax dollars, and qualified withdrawals, including earnings, are entirely tax-free. To qualify, the account must have been open for at least five years and you must be at least 59½ years old or meet specific exceptions such as a first-time home purchase.
Conclusion
Exploring these sources of tax-free cash can help you navigate financial challenges without increasing your taxable income. From leveraging HSAs and IRAs to using margin loans and HELOCs, you have several options based on your unique circumstances. Consulting with a financial adviser or tax professional for your unique situation is always recommended.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your financial advisor regarding your unique situation.
Allison A. Alexander
Financial Advisor
CFP®, CPA, CDFA®