Concerned about a Government Shutdown Cash Flow Crunch?

Last Wednesday, the federal government shut down when Congress failed to pass a bill to extend government funding into the new fiscal year.  Federal government employees—both essential workers who are required to keep working and those who are furloughed—now face the possibility of missing paychecks since most will not be paid for any work past September 30^th until Congress passes a new appropriations bill and issues backpay.* 

Since the mid-1970s, the government has shut down 20 other times for an average duration of 8 days.  However, the most recent shutdown in December 2018 was also the longest, lasting for 34 days.  If we face a similarly lengthy delay this time around, federal government workers may need to manage a short-term cash flow crunch, so we offer suggestions on how to alleviate the crunch below.

1. Tap cash savings.  If you have enough cash in your checking, savings, or money market account to replace a month or two of missed paychecks, you can stop reading this blog article and give yourself a pat on the back.  That is a very easy and cheap way to fill in the gaps for any missed paychecks, and hopefully you can just replenish your savings once Congress issues backpay for federal employees.
2. Take out an interest-free loan.  Certain credit unions (e.g. USAA and Navy Federal Credit Union) are offering interest free loans for federal employees during the government shutdown, though the amount is limited based on the net amount of your most recent paycheck and is capped at a $6,000 maximum.  PenFed and First Command are offering paycheck protection loans as well.
3. Liquidate stocks or bonds.  If you own investments in a taxable brokerage account or if you participate in an employee stock purchase plan, this might be an appropriate time to sell some stocks or bonds.  You may incur some capital gains taxes and you would ideally want to sell only if the price of the investment is relatively high, but either way, this would be a relatively easy and low-cost way to raise some cash.
4. Take out a loan with interest.  For federal government employees with savings in the Thrift Savings Plan (TSP), a TSP loan could be a helpful way to bridge the gap between paychecks.  According to the TSP website, participants can request a new TSP loan even while furloughed.  The current interest rate on TSP loans is a modest 4.25%.  Alternatively, if you have a home equity line of credit in place, you could borrow against your home equity for short-term cash needs.  Interest rates on home equity lines would be higher than the TSP but considerably lower than accumulating a balance on a credit card or taking out a personal loan.
5. Draw from retirement savings.  Taking a withdrawal from a retirement account—such as the TSP, an IRA, or a Roth IRA—would rank near the bottom of the list of options for raising short-term cash.  The amount of the withdrawal would face ordinary income tax plus a 10% early withdrawal penalty in most cases.  If you must resort to this option though, drawing from a Roth IRA would be the most tax-efficient—your original contributions of principal can be withdrawn tax-free and without penalty—though the opportunity cost of foregoing future tax-free growth might be significant.  Taking a withdrawal from an IRA would generally be preferable to withdrawals from the TSP or another employer retirement plan for a number of reasons.  (E.g., if you are paying any college tuition out-of-pocket in the same year, you may be able to avoid the early withdrawal penalty; if you put back the funds into the IRA within 60 days, you may be able to avoid taxes and penalties altogether; etc.)
6. Be aware of assistance programs.  Especially for federal employees living in Maryland, there are a number of assistance programs to provide support during the shutdown.  Utility companies are offering flexible payment arrangements and waivers for late payments, laws in Maryland and Virginia protect against eviction or foreclosure during a shutdown, etc.  Please beware though of scammers offering assistance that sounds too good to be true.  Fraudsters often use times of stress to take advantage of people under duress.

If any clients are concerned about how the government shutdown might affect your budget in the coming month or two, please call or email us, and we would be happy to discuss your options.

^{*As of October 7, there have also been reports that the White House may try to interpret the 2019 law regarding backpay for government employees as not mandating backpay for furloughed employees following a government shutdown.  Many in Congress seem to oppose this interpretation, but the outcome is unclear at this time.  The strategies to alleviate cash flow shortfalls still largely remain the same if the interruption in income is not repaid, though the loan repayments might need to be spread over a longer timeframe in that case.}