Vol. 10 - Using Your Retirement Funds in a Crisis
In this episode, we are addressing accessing funds in your retirement account to get through a crisis. We cover:
The ability to withdraw up to $100k penalty-free
How to use wisely
Long-term consequences
Alternatives before accessing
We want to hear from you! If you have money questions or if you want us to assess your finances, please complete this form.
Stay connected:
To read the full show notes, visit https://www.nursesonfirepodcast.com/cfp
How to subscribe, rate and review a podcast
To learn more about the giveaway, click here
Subscribe & Review
Love this episode? Please subscribe and leave a review on your favorite podcast platform.
TRANSCRIPT:
Naseema McElroy (00:01): All right. Welcome back, Liesa.
Leisa Peterson (00:04): Hello. Hey.
Naseema McElroy (00:06): So today we have an interesting topic and it's interesting to me because I'm pretty much clueless about, or not clueless about it, but just not really understanding how this works. And hopefully Liesa can clear this up. So what we're going to discuss today is part of the CARES act where you can now withdraw up to a hundred thousand dollars out of your retirement account penalty free. And what does that mean and who would benefit from that? Why do you think that this was implemented as part of the cares act?
Leisa Peterson (00:42): Great questions. So what we're talking about is being able to take a hundred thousand up to $100,000 out of what you said, the 403b or the 401k or the IRA, whatever the instrument is. It seems like it applies to all and take it without a 10% penalty, but you still have to pay taxes on it. So we want to make sure that's clear. But the cool thing about what they're offering is you can pay those taxes over a three year period or pay them back. And it's almost like it's creating a loan for yourself where you could borrow some money from. By taking that money out, you're not paying interest on it, you're obviously not getting any return on it. And then as long as you pay it back in that three year period, you would not have to pay income taxes on it.
Leisa Peterson (01:33): So that's what they're offering up. The reason they did that is it makes a lot of sense because as you and I were mentioning before, there are a lot of people who do not have emergency accounts, emergency reserve accounts, and so if they are cut in their income right now and they're not able to pay their bills, this is giving people a choice of using money that they would have used later for their retirement to pay their bills today, not lose their house, be able to eat, be able to, you know, take care of their other financial obligations. So it's a great idea in concept and I don't know that we've ever seen anything like this happen before actually in this way. So it's, it's pretty profound that they gave us this tool. The question is how can we use it wisely?
Naseema McElroy (02:26): Yes. Just during normal times. When you advise your clients, would you advise them to withdraw money from their 401k?
Leisa Peterson (02:35): No. It's the absolute worst case scenario and particularly you know, you getting hit with a 10% fee in normal time would be even worse. But the reason we don't want to do that is multi-fold. We don't want to take that money unless it's kind of last resort money because we are, first of all, we might be selling while the market is down and so we're giving up potential reward for sitting in the, in the market and having it come back in the future. We, most people when they take money like this, we have to assume, even though your intentions are pure, that you want to return it and put it back in there over the next three years, I don't think we're going to be in an environment where people are going to be feeling like they've got lots of extra cash. So there's a great chance you won't put it back in. And that means that you might have to work longer than you were planning before you could retire. You know, if that's even an option or higher at a lower standard of living than what you expected. So it's serious, like we don't want to do it unless we have to. Does that help?
Naseema McElroy (03:47): Yes. So for me, I'm really trying to understand why this was even included as part of the plan. If it could have such a detrimental longterm effect on people. I mean like just pulling from the retirement and losing all that money that can potentially grow. And the whole point of it is for you to have something later on down the line. Right? And for it to be $100,000 that can wipe out somebody's whole retirement. I'm just having a hard time grasping why would this be economically beneficial?
Leisa Peterson (04:20): Yeah. I think it's really in those cases of having to avoid moving or having, you know, the situation where you're not able to keep your car or would you need to get to work with, I mean these are like big decisions that you're coming up against that you, um, your only option is this because if you do it now, then the idea is you're going to keep things running smoothly going forward. But again, if there are any other ways that you could get access to money by, you know, we talked about before cutting your expenses, making some hard choices, you're going to want to do all of those before you decide that this is the only option. And it's not telling us right now, like do you all have, do you have to take it in a lump sum? Can you take it out over a period of time?
Leisa Peterson (05:20): And these are things that you can talk to your accountant about that you could talk to your financial advisor about. Uh, but you want to see, perhaps you might say, well, you know, I need let's say $5,000 and you have a hundred thousand dollar account. Like you don't want to take any more than you absolutely need. So make sure that you have some flexibility in potentially taking a few if you needed it and only if you need it. Could that be possible? Like that's a great question to ask before you go. And you know, we haven't seen like it doesn't say one time, but that may be in the code and you'd want to know that is it only one time? And then that's a really crappy situation cause you're going to have to guess and also know because the one thing about this ruling is that you could take, it was the one time you took $20,000 you're not sure the minute you know you don't need that money, it needs to go back into that account as fast as possible.
Leisa Peterson (06:22): So like this is about trusting yourself and being extremely disciplined, treating that money like gold.
Naseema McElroy (06:29): Yeah. I'm just wondering about people who are more financially savvy and they're just like, Oh now I have access to this hundred thousand dollars. Is this a good time to use that as a down payment on some like investment property or to you know, trade in the market while the market is kinda low. What about people who are thinking like this is just a big opportunity for our cash grab to get into their retirement funds to maximize whatever their financial interest is.
Leisa Peterson (07:03): Wow. Yeah, that's a really good point. And I think you and I, we try to be savers as best as we can, but some people have saved up a lot more money than they'd saved in any other place and therefore Onk and this is like giving a lighter, you know, to like a little kid like boom. Because what I say is that if you have not had access to that kind of money before, please, please, please know that there is a really good chance it is going to slip through your fingers. And it will be gone before you know like money is fascinating because some, all of these things happen inside. Give us like that we don't even really understand. Like all of a sudden I get [inaudible] that car or my husband gets that car that he's wanted or something, you know just sort of shiny object syndrome comes in and you're right. Maybe it's an investment, but in all fairness right now, unless you really created a system and you know let's say the real estate market, which I think is going to have a lag effect on all of this, like now is not the time to be buying real estate. Let's wait until we see what happens with the economy.
Leisa Peterson (08:21): And again, experienced investor is going to take a very different approach than a brand new person who says, Hey, this is money for me to set myself up with something. Go very cautiously.
Naseema McElroy (08:35): What about those people who look at it as an opportunity to roll out money into their IRA?
Leisa Peterson (08:41): So we talked about that. This would be where you take the money out of the IRA and you put it like in a Roth IRA and so your being able to change the way that the taxes are going to be handled on that money going forward and there are rules about that that have not gone away. So like if you don't have a hardship or you can't prove that that money was needed for the Covid relief and you do more than like the six or $7,000 that you can do her the tax code every year, then you are running the risk of being hit with penalties.
Naseema McElroy (09:17): I wanted to know, it seems like the way that they're defining a hardship are, there's actually no real definition of what constitutes a hardship.
Leisa Peterson (09:28): so right. There is no official definition other than affected meaning the way I interpret that for my own affairs, because I read this stuff and I pay attention and I would never want to be hit with a penalty is I'd want to show a loss of income in some area of my life. Like this is what I made last year. This is what I made before COVID and this is what it was like, something to indicate that there was an impact that would, that would pass the, no. Some tests, they're probably never going to ask you any of this stuff, but I like to have it so that I don't get caught off guard.
Naseema McElroy (10:09): Yes. And I think that's what most people should show, that they experienced a loss. I don't play with the IRS and I hope you don't either.
Leisa Peterson (10:18): No, never.
Naseema McElroy (10:23): For people who are, I think that they may be experiencing a hardship and may possibly want to tap into these funds. What do you recommend them do?
Leisa Peterson (10:33): The arrangement would be contacting, if you're employed, contacting your employer, going through the process that they're going to designate. My guess is is with the 403B, they have a loan process already set up. Is that right? Just like a 401k would.
Naseema McElroy (10:50): Um hum. Yep.
Leisa Peterson (10:51): And so instead of it being $50,000 which was I think was what a lot of 401ks limited in the past. Now it would be increased. And then you have that ability over that three year period to pay it back into that account. So you could do that. If you have an IRA, then you would approach your financial advisor that is managing that money and you would find out the process of how they're going to get that money to you.
Naseema McElroy (11:17): And the goal is if this is something that you should only tap into if it's a dire emergency and if you have to create a plan to pay it back as soon as possible. Right.
Leisa Peterson (11:30): So see what and, and maybe even use that plan to help you in deciding how much you take. Because again, every dollar matters. You don't want to pay back any more than you have to. I mean, you don't want to have a big obligation, you know, three years from now. So see what is reasonable and what could you do based on your, and
Naseema McElroy (11:54): when things returned to normal, how long would it take you to pay that money back and use that to help you to stop. Yeah. Right. So in summary, this is not something you should take lightly. This is something that you should talk to a professional about before approaching, and you really should have a solid plan around how much you take and how quickly you can pay it back. So although it might seem like it, the opportunity to get to a whole bunch of money that you previously didn't have access to, look at it as your last bottom of the barrel. Kind of like emergency fund.
Leisa Peterson (12:28): Yeah. Great food for thought.
Naseema McElroy (12:31): Okay. Well, Liesa, this was great. Another informative episode. I'm sure people will have a lot of takeaways from this, and I definitely do. I actually think I'm gonna call my four Oh three B administrator just to ask. Well, touch is about a briefly again, but yeah. Thank you.
Leisa Peterson (12:50): Thank you.
Hey there I’m Naseema
My dream is for everyone to know that financial independence is attainable with a little intentionality. Learn how I can help you finally break the cycle of living paycheck to paycheck.
Join the Facebook Community
Join the Financially Intentional community and get access to resources to guide you on the path to Financial Freedom.
Watch these Videos To Learn How to…
Keep Listening
Here are some more episodes you may enjoy…
In this episode, we'll explore why disability insurance is important, how it works, and why it's important to have coverage.