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Q: I suffer from Lyme disease, and I'm undergoing naturopathic therapy, which isn't covered by my health insurance. So far I've spent more than $35,000 out of pocket. I feel a bit better, but I anticipate two more years of costly treatments. I've already exhausted my savings and maxed out my flexible spending account for the year. Would you suggest that I withdraw from my retirement account (I've saved $110,000), buy supplemental health insurance, or take out a personal loan?
A: I'm so glad you are on the mend; recovery from Lyme disease can be a long, slow, and—as you note—expensive process.
Even though you're strapped for cash, I'd advise you not to touch your 401(k). It just isn't smart to repay a loan with after-tax dollars only to have that money taxed again when you withdraw it during retirement. And finding a supplemental insurance policy that would cover you might prove difficult given your preexisting condition.
So what are your options? For starters, ask your naturopath to let you spread your payments over an extended period. Also take advantage of a tax break Uncle Sam offers: When you file an itemized return, you can deduct medical expenses that exceed 10 percent of your adjustable gross income (AGI). Let's say your AGI is $75,000. That means you can write off out-of-pocket payments in excess of $7,500. (Check out IRS publication 502 for a list of qualified expenses.)
As far as borrowing goes, a personal unsecured loan can be costly. Interest rates depend on where you live, how much you request, how long you need for repayment, and your creditworthiness. Some lenders now charge 10 percent or more.
You may want to consider a fixed-rate home equity loan (HEL) if you own your house. Let me stress that I'm not talking about an adjustable home equity line of credit (HELOC), which is too risky given that today's low rates will certainly rise. A credit union like Pentagon Federal offers solid HEL deals, including a fixed interest rate under 4 percent. (Anyone can join PenFed with a donation to a designated military nonprofit.)
Another option is to request a loan from a friend or family member. As with any loan, you must pay interest. (Google "simple promissory note" to find examples of how to draw up a deal.) If someone has more than eight months of savings in an account earning less than 1 percent, they may welcome the chance to let you borrow their surplus funds at 5 percent interest. Both parties win: You borrow at a reasonable rate, and your lender earns a great return.
Suze Orman's latest book is The Money Class: How to Stand in Your Truth and Create the Future You Deserve (Spiegel & Grau). Ask Suze Orman your questions about debt and saving money here.
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