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Should I open a CD when resources are tight?

June 12, 2014

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

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Q: I'm 56 years old, taking care of two parents who are 79 and live with me. I'm also taking care of three grandchildren ages 5 through 11, who are not yet receiving any child support. Was working two jobs, but got laid off from one, which also caused me to lose my health insurance, which I now buy privately. Because of my situation, there was a loan against my retirement plan, which cashed out now totals $16,000. I want to be able to draw on the money in emergencies without penalty. I was thinking a savings account, but came across a 1.10 percent one-year CD. Any advice would be welcome. I know the money won't earn much, but I want it at least to earn some interest.

A: You have certainly taken on a multi-generational bundle of challenges. To start with the simple part first, while 1.10 percent is a good interest rate by today's standards, a one-year CD does not meet your need to be able to access the money without penalty in an emergency. Take a look instead at the best savings accounts and money market accounts and you should be able to find some offering nearly as much interest without the penalty if you need the money within one year.

Given all the people under your care, if you have not done so already, you should contact your county's social services office to see what resources may be available to you. There is a somewhat confusing array of benefits available for the elderly, veterans and children from federal, state and local governments. Any person unfamiliar with that world would have a hard time finding out what is available, let alone navigating the application process, but social services specialists often have their fingers on the pulse of what is available and how to get it. You should not let the fact that you are working hard deter you from accepting a little extra help with all you have taken on.

On another matter, you mention that your retirement plan was diminished because you borrowed against it before cashing it out. You should check the IRS website at irs.gov to see whether you have inadvertently made an unqualified withdrawal by borrowing against it without paying it back.

Finally, this won't help your situation, but it might help others who read this: When pressed for cash, keep in mind that 401(k) plans and other employee-benefit balances are typically protected from creditors. This is yet another reason to refrain from tapping into those resources prematurely, let alone cashing them out.

Best of luck with your situation -- you are to be admired for all the responsibilities you have taken on.

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