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Episode 30, the one reason not to touch your retirement savings. Hello and welcome to the Savvy Budget Girl podcast. I'm your host and certified money geek, wendy Koop. Okay, there's really no such thing as being certified as a money geek, but if there was, I would have it. In today's episode we're going to dive into the reasons you might want to get into your retirement savings early and the one reason you should never touch your retirement savings. But before we do that, today's episode is sponsored by me and my podcast launch service. If you've been wanting to start a podcast for fun and profit, look no further than to the lovely woman behind the microphone. That's me. With my podcast launch services, your podcast could be up and running in as little as 30 days with ongoing support from me. To find out more and book a discovery call, click the link in the show notes or DM the word call C-A-L-L to my Instagram account at Savvy Budget Girl. Now back to the show. Whether your retirement is sitting in a 401k, 403b or IRA of many varieties, there are circumstances outside of retirement that will allow you to pull out money from these accounts, whether, without penalty, there are withdrawals and there are loans. What you do with the money will determine what category your action falls into. Mostly, before we go into the different types of loans and withdrawals, let me encourage you to find any and all other options before tapping into your retirement savings. This money is for your future self, and we don't want you to mortgage your future for short-term gains. Also, if you have questions about tax implications, please consult your tax advisor. I am not that person. So what is the difference between a loan and a withdrawal? Well, a loan lets you borrow money from your retirement account and pay yourself back over time with interest, so both the interest and your payment go back into the account. A withdrawal is a permanent removal of the money from your account and will likely result in extra taxes and penalties. However, the money will be available for your immediate use. Now you may have heard of something called a hardship withdrawal, and so the IRS considers immediate and heavy financial need for hardship withdrawal, and so what I'm reading to you is coming from an article on Fidelitycom about taking money from your 401K, and this article will be linked in the show notes, and so it says this medical expenses, the prevention of foreclosure or eviction, tuition payments, funeral expenses, costs excluding mortgage payments related to purchase and repair of primary residence and expenses and losses resulting from a federal declaration of disaster, subject to certain conditions. Again, check with the professionals on this if you think you qualify for a hardship withdrawal. So with a withdrawal, the upside is, or the pro is, that you don't have to pay back the money. The con is that it is generally taxed at your ordinary income level and there is a 10% early withdrawal 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 so that if you're trying to access $1,000, and I'm not going to do the math here, if you're trying to access $1,000, by the time you get hit with ordinary income tax and the 10% penalty, you're not going to have the full $1,000. And the more money you're trying to take, the more money you're going to lose in taxes and penalties. So now let's talk about a 401k loan. So the type of loan varies greatly on your employer, but you might be able to borrow up to 50% of your account up to a maximum of $50,000 in a 12 month period, depending on your employer. Every place has different rules and in most cases you'll have to pay that money back with interest within five years of taking it out, and your specific plan will let you know how many of these loans you can have out at one time and if you need your spouse or partner to approve the loan before you take it out. The pro of before a 1k loan if there is a pro is that you don't pay taxes and penalties to access the money and if you miss a payment it doesn't impact your credit score. However and here are the cons If you leave your job or get terminated, you may have to pay the balance within a very short period of time and if you can't pay back the loan for any reason, you'll be subject to a guess what. 10% early will draw a penalty If you're under age 59 and a half and ordinary income taxes plus the loan will be in default. And I don't know about you, but employment situations these days aren't exactly of the stable variety. You know. Anything can happen to anyone at any point in time. So you are really risking a lot by taking out a 401k loan. But let's look at some alternatives to a loan or withdrawal. So if it's a qualified medical expense, you'll want to use your HSA funds or your health savings account. You could use emergency savings. You could transfer high interest credit card balances to a lower interest or zero interest rate card. You could use other non-retirement savings accounts. So what's in your tracking account? What's in your regular savings account? What's in your money market account? You could tap into a home equity line of credit or a personal loan. If it's that serious. You could withdraw from a Roth IRA and you may be able to do this without penalty. And that's simply because a Roth IRA uses after-tax money, so you've already paid the taxes on that money before you put it in the Roth IRA. You could work overtime, you could pick up a side gig, you could freelance. You could do a lot of things. But we want you to run through this whole list of things before you dip into your retirement savings, because, I get it, sometimes there's just no getting around it. But digging into your retirement savings, like I said, is the last option on the list. But what is the one reason you should never touch your retirement account? Holiday shopping, yep, you heard me right. There are some people out there right now who are desperately trying to pay off current 401k loans so that they can take out another loan and buy Christmas gifts. According to investopediacom, the average American is expected to spend about $875 during the winter holiday season. When you add to the recent articles that many Americans don't have the money to cover a $400 emergency, and even six figure earners are living paycheck to paycheck, you have to wonder what's going on and how far above our means we are truly living. I'm no Grinch and I'm not a minimalist and I'm not anti-gift, but if the only way you can afford gifts for your family is to borrow against your future, then I would argue your priorities are a bit out of whack. Sounds harsh, definitely sounds harsh, and I'm not trying to be mean. But who cares about the stuff in 10 or 20 years when you can't retire and have to keep working because you didn't have enough money saved? Who cares about the toys and the PS5s when you might not be able to afford groceries in five years? And what good is having the latest and greatest if you're going into the new year stressed about paying back alone and hoping you don't get laid off from your job, making the full amount due sooner than you expected? I wish I was making this up. I really do, and I wish I could tell you. Consumers in this country doesn't run that deep, but it does folks. The pressure from family, friends and co-workers to give gifts and make everyone happy with stuff and vacations is killing your budget and putting a stranglehold on your ability to retire. Well, but I'm not just going to leave you like that with all doom and gloom. So here are my suggestions for giving gifts within your budget this holiday season. You do have a budget right. You do know how much you have to spend this holiday season, because that's important, because everything is going to look good and you want to give people all the things and all the experiences. But you have to know your limits, you have to know your constraints, you have to know your boundaries, and boundaries are good. So here's what you can do, and I've done many of these, so I'm not just theoretically telling you what to do. This is really what I've done some of these so you can make your gifts by hand, spending only the cost of materials. I did that last year. You could avoid shipping physical gifts by having them sent directly to the recipient or delivered digitally, so, like if you were planning on buying gift cards and gift certificates, you could have them delivered digitally rather than printing them out or buying the physical card and then shipping it to the recipient, or, if it's a drop shipping situation, you could get the gift directly delivered to your recipient. You could buy or make coupons redeemable for experiences and chores. This is really good for kids, because kids have no money. Typically. You can make these yourself in Canva or you can buy them on Etsy as a downloadable file and then make them individual to your circumstance, and this goes year round. It doesn't have to just be for Christmas or Hanukkah or whatever you're celebrating during the winter season. These are good for Valentine's Day, 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 that sell them and there are ones like I said, you can just make them yourself in Canva for free, or draw them out by hand. Just be creative. You could donate money to charity in lieu of receiving gifts in, and its inverse is also true. If you want to keep people from buying you gifts because you're trying to cut down on the number of things you receive, or for whatever reason, you can ask for gift cards or donations to charity in lieu of receiving gifts. You could cook or bake food as a gift and deliver that for the holidays, and just use your imagination to give something truly unique to that person. So, whether you're an awesome photographer and you want to gift people the photography sessions, or you want to make websites for them or draw for them or cook for them, or there's so many things that you can do, just don't be. Just don't think that Christmas doesn't live at the mall is what I'm trying to say. Christmas doesn't live at the store. It's not bound by what you can buy with money. There are so many wonderful things about the holiday season whether that's experiences and caroling or serving our homeless friends or whatever else that you do during the holiday season. It's not wrapped up, no pun intended, in what you can buy at the store. And again, I know this isn't easy for some of you and there are tons of blog posts out there about how people have navigated the holidays on a tight budget, especially with large families and extended families. Just know that it can be done and if people ask why things have changed this year, you can let them know politely that you are saving money for a huge, exciting goal and are trying to stay on track and would appreciate their help in reaching said goal. You can say as much or as little as you want. You don't have to tell everyone about your financial situation. Everyone doesn't need to know and will there be disagreements and disappointment? Probably but you are working on keeping your home stable and together. It doesn't matter what others are doing, because the season really isn't about the gifts, right, it's not. Think about the actual reason for the season. We'll do another episode on that. You could start new traditions and go and serve, show people what Christmas is really about and keep your wallet and purse intact but, most importantly, keep your retirement savings where it belongs. Okay, so that episode was a doozy, but when I heard people were borrowing against their retirement to pay for Christmas, I knew I needed to record this episode. So thanks for hanging with me today. And remember you can always check out the blog for more articles at SavvyBudgetGirlcom. Review the show notes for more information. Check out the YouTube channel and subscribe if you're watching. If you're listening to the audio and not watching the YouTube channel, if you are watching the YouTube channel and want to hear the audio, make sure you follow on your favorite podcast service and if you're ready to get that podcast, going for fine or profit. Dm me over on Instagram at SavvyBudgetGirl. That is all for this episode. Until next time, click or tap the screen for the next video or listen to the next episode. Bye.
