December 4, 2023 • 14 mins
Imagine a future where you're living comfortably because you made smart decisions about your retirement savings now. That's the promise we're making in today's episode of the Savvy Budget Girl podcast. We're exploring the reasons you might be tempted to dip into your retirement savings early and why you should resist it. We're also distinguishing between taking a loan and withdrawing from your retirement account and the potential tax implications.
Have you heard of the term 'hardship withdrawal'? We explain what the IRS considers a hardship and the conditions that might allow one to access funds without penalty. But remember, always consult with a tax advisor. We then move on to the subject of 401k loans, dissecting the allure of quick cash and the pitfalls that come with it. It's all about equipping you with the knowledge to make the best financial decisions for your future.
Ready to launch your podcast for fun and profit? Click the link below or contact me on IG at @savvybudgetgirl!
Resources from today's episode:
https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k
https://www.debt.org/retirement/401k-loan/
https://www.investopedia.com/financial-edge/1112/average-cost-of-an-american-christmas.aspx
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Episode 30, the one reason not to touch your
retirement savings.
Hello and welcome to the SavvyBudget Girl podcast.
I'm your host and certifiedmoney geek, wendy Koop.
Okay, there's really no suchthing as being certified as a
money geek, but if there was, Iwould have it.
In today's episode we're goingto dive into the reasons you
(00:24):
might want to get into yourretirement savings early and the
one reason you should nevertouch your retirement savings.
But before we do that, today'sepisode is sponsored by me and
my podcast launch service.
If you've been wanting to starta podcast for fun and profit,
look no further than to thelovely woman behind the
(00:46):
microphone.
That's me.
With my podcast launch services, your podcast could be up and
running in as little as 30 dayswith ongoing support from me.
To find out more and book adiscovery call, click the link
in the show notes or DM the wordcall C-A-L-L to my Instagram
account at Savvy Budget Girl.
(01:08):
Now back to the show.
Whether your retirement issitting in a 401k, 403b or IRA
of many varieties, there arecircumstances outside of
retirement that will allow youto pull out money from these
accounts, whether, withoutpenalty, there are withdrawals
(01:30):
and there are loans.
What you do with the money willdetermine what category your
action falls into.
Mostly, before we go into thedifferent types of loans and
withdrawals, let me encourageyou to find any and all other
options before tapping into yourretirement savings.
This money is for your futureself, and we don't want you to
(01:53):
mortgage your future forshort-term gains.
Also, if you have questionsabout tax implications, please
consult your tax advisor.
I am not that person.
So what is the differencebetween a loan and a withdrawal?
Well, a loan lets you borrowmoney from your retirement
(02:14):
account and pay yourself backover time with interest, so both
the interest and your paymentgo back into the account.
A withdrawal is a permanentremoval of the money from your
account and will likely resultin extra taxes and penalties.
However, the money will beavailable for your immediate use
(02:37):
.
Now you may have heard ofsomething called a hardship
withdrawal, and so the IRSconsiders immediate and heavy
financial need for hardshipwithdrawal, and so what I'm
reading to you is coming from anarticle on Fidelitycom about
taking money from your 401K, andthis article will be linked in
(02:58):
the show notes, and so it saysthis medical expenses, the
prevention of foreclosure oreviction, tuition payments,
funeral expenses, costsexcluding mortgage payments
related to purchase and repairof primary residence and
expenses and losses resultingfrom a federal declaration of
(03:18):
disaster, subject to certainconditions.
Again, check with theprofessionals on this if you
think you qualify for a hardshipwithdrawal.
So with a withdrawal, theupside is, or the pro is, that
you don't have to pay back themoney.
The con is that it is generallytaxed at your ordinary income
(03:39):
level and there is a 10% earlywithdrawal penalty if you are
younger than age 59 and a half,unless you meet one of the IRS
exceptions.
So that's important to know sothat if you're trying to access
$1,000, and I'm not going to dothe math here, if you're trying
to access $1,000, by the timeyou get hit with ordinary income
(04:00):
tax and the 10% penalty, you'renot going to have the full
$1,000.
And the more money you'retrying to take, the more money
you're going to lose in taxesand penalties.
So now let's talk about a 401kloan.
So the type of loan variesgreatly on your employer, but
(04:22):
you might be able to borrow upto 50% of your account up to a
maximum of $50,000 in a 12 monthperiod, depending on your
employer.
Every place has different rulesand in most cases you'll have
to pay that money back withinterest within five years of
taking it out, and your specificplan will let you know how many
(04:46):
of these loans you can have outat one time and if you need
your spouse or partner toapprove the loan before you take
it out.
The pro of before a 1k loan ifthere is a pro is that you don't
pay taxes and penalties toaccess the money and if you miss
a payment it doesn't impactyour credit score.
However and here are the consIf you leave your job or get
(05:11):
terminated, you may have to paythe balance within a very short
period of time and if you can'tpay back the loan for any reason
, you'll be subject to a guesswhat.
10% early will draw a penaltyIf you're under age 59 and a
half and ordinary income taxesplus the loan will be in default
.
And I don't know about you, butemployment situations these
(05:36):
days aren't exactly of thestable variety.
You know.
Anything can happen to anyoneat any point in time.
So you are really risking a lotby taking out a 401k loan.
But let's look at somealternatives to a loan or
withdrawal.
So if it's a qualified medicalexpense, you'll want to use your
(05:58):
HSA funds or your healthsavings account.
You could use emergency savings.
You could transfer highinterest credit card balances to
a lower interest or zerointerest rate card.
You could use othernon-retirement savings accounts.
So what's in your trackingaccount?
What's in your regular savingsaccount?
What's in your money marketaccount?
(06:19):
You could tap into a homeequity line of credit or a
personal loan.
If it's that serious.
You could withdraw from a RothIRA and you may be able to do
this without penalty.
And that's simply because aRoth IRA uses after-tax money,
so you've already paid the taxeson that money before you put it
in the Roth IRA.
(06:40):
You could work overtime, youcould pick up a side gig, you
could freelance.
You could do a lot of things.
But we want you to run throughthis whole list of things before
you dip into your retirementsavings, because, I get it,
sometimes there's just nogetting around it.
(07:00):
But digging into yourretirement savings, like I said,
is the last option on the list.
But what is the one reason youshould never touch your
retirement account?
Holiday shopping, yep, youheard me right.
There are some people out thereright now who are desperately
trying to pay off current 401kloans so that they can take out
(07:23):
another loan and buy Christmasgifts.
According to investopediacom,the average American is expected
to spend about $875 during thewinter holiday season.
When you add to the recentarticles that many Americans
don't have the money to cover a$400 emergency, and even six
(07:44):
figure earners are livingpaycheck to paycheck, you have
to wonder what's going on andhow far above our means we are
truly living.
I'm no Grinch and I'm not aminimalist and I'm not anti-gift
, but if the only way you canafford gifts for your family is
to borrow against your future,then I would argue your
(08:04):
priorities are a bit out ofwhack.
Sounds harsh, definitely soundsharsh, and I'm not trying to be
mean.
But who cares about the stuffin 10 or 20 years when you can't
retire and have to keep workingbecause you didn't have enough
money saved?
Who cares about the toys andthe PS5s when you might not be
(08:25):
able to afford groceries in fiveyears?
And what good is having thelatest and greatest if you're
going into the new year stressedabout paying back alone and
hoping you don't get laid offfrom your job, making the full
amount due sooner than youexpected?
I wish I was making this up.
I really do, and I wish I couldtell you.
Consumers in this countrydoesn't run that deep, but it
(08:48):
does folks.
The pressure from family,friends and co-workers to give
gifts and make everyone happywith stuff and vacations is
killing your budget and puttinga stranglehold on your ability
to retire.
Well, but I'm not just going toleave you like that with all
doom and gloom.
So here are my suggestions forgiving gifts within your budget
(09:11):
this holiday season.
You do have a budget right.
You do know how much you haveto spend this holiday season,
because that's important,because everything is going to
look good and you want to givepeople all the things and all
the experiences.
But you have to know yourlimits, you have to know your
(09:31):
constraints, you have to knowyour boundaries, and boundaries
are good.
So here's what you can do, andI've done many of these, so I'm
not just theoretically tellingyou what to do.
This is really what I've donesome of these so you can make
your gifts by hand, spendingonly the cost of materials.
I did that last year.
(09:53):
You could avoid shippingphysical gifts by having them
sent directly to the recipientor delivered digitally, so, like
if you were planning on buyinggift cards and gift certificates
, you could have them delivereddigitally rather than printing
them out or buying the physicalcard and then shipping it to the
recipient, or, if it's a dropshipping situation, you could
(10:17):
get the gift directly deliveredto your recipient.
You could buy or make couponsredeemable for experiences and
chores.
This is really good for kids,because kids have no money.
Typically.
You can make these yourself inCanva or you can buy them on
Etsy as a downloadable file andthen make them individual to
(10:42):
your circumstance, and this goesyear round.
It doesn't have to just be forChristmas or Hanukkah or
whatever you're celebratingduring the winter season.
These are good for Valentine'sDay, these are good for Mother's
Day.
These are good for Father's Day.
These can be used year round.
So there are Etsy shops thatsell them and there are ones
like I said, you can just makethem yourself in Canva for free,
(11:04):
or draw them out by hand.
Just be creative.
You could donate money tocharity in lieu of receiving
gifts in, and its inverse isalso true.
If you want to keep people frombuying you gifts because you're
trying to cut down on thenumber of things you receive, or
(11:26):
for whatever reason, you canask for gift cards or donations
to charity in lieu of receivinggifts.
You could cook or bake food asa gift and deliver that for the
holidays, and just use yourimagination to give something
truly unique to that person.
So, whether you're an awesomephotographer and you want to
(11:49):
gift people the photographysessions, or you want to make
websites for them or draw forthem or cook for them, or
there's so many things that youcan do, just don't be.
Just don't think that Christmasdoesn't live at the mall is what
I'm trying to say.
Christmas doesn't live at thestore.
(12:09):
It's not bound by what you canbuy with money.
There are so many wonderfulthings about the holiday season
whether that's experiences andcaroling or serving our homeless
friends or whatever else thatyou do during the holiday season
.
It's not wrapped up, no punintended, in what you can buy at
(12:35):
the store.
And again, I know this isn'teasy for some of you and there
are tons of blog posts out thereabout how people have navigated
the holidays on a tight budget,especially with large families
and extended families.
Just know that it can be doneand if people ask why things
have changed this year, you canlet them know politely that you
(12:57):
are saving money for a huge,exciting goal and are trying to
stay on track and wouldappreciate their help in
reaching said goal.
You can say as much or aslittle as you want.
You don't have to tell everyoneabout your financial situation.
Everyone doesn't need to knowand will there be disagreements
(13:18):
and disappointment?
Probably but you are working onkeeping your home stable and
together.
It doesn't matter what othersare doing, because the season
really isn't about the gifts,right, it's not.
Think about the actual reasonfor the season.
We'll do another episode onthat.
You could start new traditionsand go and serve, show people
(13:40):
what Christmas is really aboutand keep your wallet and purse
intact but, most importantly,keep your retirement savings
where it belongs.
Okay, so that episode was adoozy, but when I heard people
were borrowing against theirretirement to pay for Christmas,
I knew I needed to record thisepisode.
(14:02):
So thanks for hanging with metoday.
And remember you can alwayscheck out the blog for more
articles at SavvyBudgetGirlcom.
Review the show notes for moreinformation.
Check out the YouTube channeland subscribe if you're watching
.
If you're listening to theaudio and not watching the
YouTube channel, if you arewatching the YouTube channel and
(14:23):
want to hear the audio, makesure you follow on your favorite
podcast service and if you'reready to get that podcast, going
for fine or profit.
Dm me over on Instagram atSavvyBudgetGirl.
That is all for this episode.
Until next time, click or tapthe screen for the next video or
listen to the next episode.
Bye.
Episode 30, the one reason not to touch your
retirement savings.
Hello and welcome to the SavvyBudget Girl podcast.
I'm your host and certifiedmoney geek, wendy Koop.
Okay, there's really no suchthing as being certified as a
money geek, but if there was, Iwould have it.
In today's episode we're goingto dive into the reasons you
(00:24):
might want to get into yourretirement savings early and the
one reason you should nevertouch your retirement savings.
But before we do that, today'sepisode is sponsored by me and
my podcast launch service.
If you've been wanting to starta podcast for fun and profit,
look no further than to thelovely woman behind the
(00:46):
microphone.
That's me.
With my podcast launch services, your podcast could be up and
running in as little as 30 dayswith ongoing support from me.
To find out more and book adiscovery call, click the link
in the show notes or DM the wordcall C-A-L-L to my Instagram
account at Savvy Budget Girl.
(01:08):
Now back to the show.
Whether your retirement issitting in a 401k, 403b or IRA
of many varieties, there arecircumstances outside of
retirement that will allow youto pull out money from these
accounts, whether, withoutpenalty, there are withdrawals
(01:30):
and there are loans.
What you do with the money willdetermine what category your
action falls into.
Mostly, before we go into thedifferent types of loans and
withdrawals, let me encourageyou to find any and all other
options before tapping into yourretirement savings.
This money is for your futureself, and we don't want you to
(01:53):
mortgage your future forshort-term gains.
Also, if you have questionsabout tax implications, please
consult your tax advisor.
I am not that person.
So what is the differencebetween a loan and a withdrawal?
Well, a loan lets you borrowmoney from your retirement
(02:14):
account and pay yourself backover time with interest, so both
the interest and your paymentgo back into the account.
A withdrawal is a permanentremoval of the money from your
account and will likely resultin extra taxes and penalties.
However, the money will beavailable for your immediate use
(02:37):
.
Now you may have heard ofsomething called a hardship
withdrawal, and so the IRSconsiders immediate and heavy
financial need for hardshipwithdrawal, and so what I'm
reading to you is coming from anarticle on Fidelitycom about
taking money from your 401K, andthis article will be linked in
(02:58):
the show notes, and so it saysthis medical expenses, the
prevention of foreclosure oreviction, tuition payments,
funeral expenses, costsexcluding mortgage payments
related to purchase and repairof primary residence and
expenses and losses resultingfrom a federal declaration of
(03:18):
disaster, subject to certainconditions.
Again, check with theprofessionals on this if you
think you qualify for a hardshipwithdrawal.
So with a withdrawal, theupside is, or the pro is, that
you don't have to pay back themoney.
The con is that it is generallytaxed at your ordinary income
(03:39):
level and there is a 10% earlywithdrawal penalty if you are
younger than age 59 and a half,unless you meet one of the IRS
exceptions.
So that's important to know sothat if you're trying to access
$1,000, and I'm not going to dothe math here, if you're trying
to access $1,000, by the timeyou get hit with ordinary income
(04:00):
tax and the 10% penalty, you'renot going to have the full
$1,000.
And the more money you'retrying to take, the more money
you're going to lose in taxesand penalties.
So now let's talk about a 401kloan.
So the type of loan variesgreatly on your employer, but
(04:22):
you might be able to borrow upto 50% of your account up to a
maximum of $50,000 in a 12 monthperiod, depending on your
employer.
Every place has different rulesand in most cases you'll have
to pay that money back withinterest within five years of
taking it out, and your specificplan will let you know how many
(04:46):
of these loans you can have outat one time and if you need
your spouse or partner toapprove the loan before you take
it out.
The pro of before a 1k loan ifthere is a pro is that you don't
pay taxes and penalties toaccess the money and if you miss
a payment it doesn't impactyour credit score.
However and here are the consIf you leave your job or get
(05:11):
terminated, you may have to paythe balance within a very short
period of time and if you can'tpay back the loan for any reason
, you'll be subject to a guesswhat.
10% early will draw a penaltyIf you're under age 59 and a
half and ordinary income taxesplus the loan will be in default
.
And I don't know about you, butemployment situations these
(05:36):
days aren't exactly of thestable variety.
You know.
Anything can happen to anyoneat any point in time.
So you are really risking a lotby taking out a 401k loan.
But let's look at somealternatives to a loan or
withdrawal.
So if it's a qualified medicalexpense, you'll want to use your
(05:58):
HSA funds or your healthsavings account.
You could use emergency savings.
You could transfer highinterest credit card balances to
a lower interest or zerointerest rate card.
You could use othernon-retirement savings accounts.
So what's in your trackingaccount?
What's in your regular savingsaccount?
What's in your money marketaccount?
(06:19):
You could tap into a homeequity line of credit or a
personal loan.
If it's that serious.
You could withdraw from a RothIRA and you may be able to do
this without penalty.
And that's simply because aRoth IRA uses after-tax money,
so you've already paid the taxeson that money before you put it
in the Roth IRA.
(06:40):
You could work overtime, youcould pick up a side gig, you
could freelance.
You could do a lot of things.
But we want you to run throughthis whole list of things before
you dip into your retirementsavings, because, I get it,
sometimes there's just nogetting around it.
(07:00):
But digging into yourretirement savings, like I said,
is the last option on the list.
But what is the one reason youshould never touch your
retirement account?
Holiday shopping, yep, youheard me right.
There are some people out thereright now who are desperately
trying to pay off current 401kloans so that they can take out
(07:23):
another loan and buy Christmasgifts.
According to investopediacom,the average American is expected
to spend about $875 during thewinter holiday season.
When you add to the recentarticles that many Americans
don't have the money to cover a$400 emergency, and even six
(07:44):
figure earners are livingpaycheck to paycheck, you have
to wonder what's going on andhow far above our means we are
truly living.
I'm no Grinch and I'm not aminimalist and I'm not anti-gift
, but if the only way you canafford gifts for your family is
to borrow against your future,then I would argue your
(08:04):
priorities are a bit out ofwhack.
Sounds harsh, definitely soundsharsh, and I'm not trying to be
mean.
But who cares about the stuffin 10 or 20 years when you can't
retire and have to keep workingbecause you didn't have enough
money saved?
Who cares about the toys andthe PS5s when you might not be
(08:25):
able to afford groceries in fiveyears?
And what good is having thelatest and greatest if you're
going into the new year stressedabout paying back alone and
hoping you don't get laid offfrom your job, making the full
amount due sooner than youexpected?
I wish I was making this up.
I really do, and I wish I couldtell you.
Consumers in this countrydoesn't run that deep, but it
(08:48):
does folks.
The pressure from family,friends and co-workers to give
gifts and make everyone happywith stuff and vacations is
killing your budget and puttinga stranglehold on your ability
to retire.
Well, but I'm not just going toleave you like that with all
doom and gloom.
So here are my suggestions forgiving gifts within your budget
(09:11):
this holiday season.
You do have a budget right.
You do know how much you haveto spend this holiday season,
because that's important,because everything is going to
look good and you want to givepeople all the things and all
the experiences.
But you have to know yourlimits, you have to know your
(09:31):
constraints, you have to knowyour boundaries, and boundaries
are good.
So here's what you can do, andI've done many of these, so I'm
not just theoretically tellingyou what to do.
This is really what I've donesome of these so you can make
your gifts by hand, spendingonly the cost of materials.
I did that last year.
(09:53):
You could avoid shippingphysical gifts by having them
sent directly to the recipientor delivered digitally, so, like
if you were planning on buyinggift cards and gift certificates
, you could have them delivereddigitally rather than printing
them out or buying the physicalcard and then shipping it to the
recipient, or, if it's a dropshipping situation, you could
(10:17):
get the gift directly deliveredto your recipient.
You could buy or make couponsredeemable for experiences and
chores.
This is really good for kids,because kids have no money.
Typically.
You can make these yourself inCanva or you can buy them on
Etsy as a downloadable file andthen make them individual to
(10:42):
your circumstance, and this goesyear round.
It doesn't have to just be forChristmas or Hanukkah or
whatever you're celebratingduring the winter season.
These are good for Valentine'sDay, these are good for Mother's
Day.
These are good for Father's Day.
These can be used year round.
So there are Etsy shops thatsell them and there are ones
like I said, you can just makethem yourself in Canva for free,
(11:04):
or draw them out by hand.
Just be creative.
You could donate money tocharity in lieu of receiving
gifts in, and its inverse isalso true.
If you want to keep people frombuying you gifts because you're
trying to cut down on thenumber of things you receive, or
(11:26):
for whatever reason, you canask for gift cards or donations
to charity in lieu of receivinggifts.
You could cook or bake food asa gift and deliver that for the
holidays, and just use yourimagination to give something
truly unique to that person.
So, whether you're an awesomephotographer and you want to
(11:49):
gift people the photographysessions, or you want to make
websites for them or draw forthem or cook for them, or
there's so many things that youcan do, just don't be.
Just don't think that Christmasdoesn't live at the mall is what
I'm trying to say.
Christmas doesn't live at thestore.
(12:09):
It's not bound by what you canbuy with money.
There are so many wonderfulthings about the holiday season
whether that's experiences andcaroling or serving our homeless
friends or whatever else thatyou do during the holiday season
.
It's not wrapped up, no punintended, in what you can buy at
(12:35):
the store.
And again, I know this isn'teasy for some of you and there
are tons of blog posts out thereabout how people have navigated
the holidays on a tight budget,especially with large families
and extended families.
Just know that it can be doneand if people ask why things
have changed this year, you canlet them know politely that you
(12:57):
are saving money for a huge,exciting goal and are trying to
stay on track and wouldappreciate their help in
reaching said goal.
You can say as much or aslittle as you want.
You don't have to tell everyoneabout your financial situation.
Everyone doesn't need to knowand will there be disagreements
(13:18):
and disappointment?
Probably but you are working onkeeping your home stable and
together.
It doesn't matter what othersare doing, because the season
really isn't about the gifts,right, it's not.
Think about the actual reasonfor the season.
We'll do another episode onthat.
You could start new traditionsand go and serve, show people
(13:40):
what Christmas is really aboutand keep your wallet and purse
intact but, most importantly,keep your retirement savings
where it belongs.
Okay, so that episode was adoozy, but when I heard people
were borrowing against theirretirement to pay for Christmas,
I knew I needed to record thisepisode.
(14:02):
So thanks for hanging with metoday.
And remember you can alwayscheck out the blog for more
articles at SavvyBudgetGirlcom.
Review the show notes for moreinformation.
Check out the YouTube channeland subscribe if you're watching
.
If you're listening to theaudio and not watching the
YouTube channel, if you arewatching the YouTube channel and
(14:23):
want to hear the audio, makesure you follow on your favorite
podcast service and if you'reready to get that podcast, going
for fine or profit.
Dm me over on Instagram atSavvyBudgetGirl.
That is all for this episode.
Until next time, click or tapthe screen for the next video or
listen to the next episode.
Bye.
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