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- What's the worst piece of money advice you've ever been given? Unfortunately, that question is way too easy for a lot of people to answer. And perhaps the biggest reason for that is YouTubers. See, the problem with YouTubers is that they can't all do as good of a job as me. Looking at you, John Deloney. Just kidding, that guy's crushing it. And he's my best friend.
But in all seriousness, there's a ton of so-called money experts out there who dish out some really terrible financial advice. And it's not just even on YouTube anymore. This stuff has infected TikTok, Instagram, and even Facebook. That's right, just below the Which Disney Princess Are You quiz your Aunt Susan posted a link to. I got sadness from inside out, by the way. But that's a conversation for me and my therapist. Well, today, we're going to talk about one particularly concerning piece of advice that's picked up steam lately on all those platforms.
taking money out of your 401k to use on God knows what. Before we hop in, don't forget that Disney princesses always like and subscribe. Except for Elsa. She's too cold-hearted for that.
Now, if you don't believe that taking money from your 401k is a real problem, just listen to this wild call I recently took on The Ramsey Show from a real person. I asked if I could borrow from his 401k so that I could, you know, invest in flips. The first house did not sell. I did it again with the hopes of, you know, the same goal. And now I'm stuck with a house that is nearing its maturity for the hard money loan to be paid. How much did you take out? $40,000. $40,000, and that was a straight-up withdrawal?
Yeah. So you paid upwards of what, 35% in taxes and penalties? That's exactly what happened. What area of Boston is this? No, this is in Birmingham, Alabama. Okay. What you're buying real estate across the country? Yeah. What made you go, we're going to purchase property thousands of miles away and hope for the best?
Oh, goodness gracious. Unsubscribe. Okay, that was a lot to take in, so let's recap here. Jane took $40,000 out of her husband's 401k, apparently with his permission.
She used that money and a risky short-term loan to buy a house in Birmingham, which is almost 1,200 miles away from where she actually lives, Boston. When she tried flipping the house, it didn't sell. So then she thought, let me try this whole process again. And shocker, it didn't work the second time either, leaving poor Jane with three houses and three mortgages and in a real pickle. But here's the kicker.
All the money she took out of her husband's 401k was taxed at a whopping 35%. That makes me want to vomit, much like when I see men wearing socks with Birkenstocks. At this point, I might as well capitalize on the stupid trend and create Birkensocks.
TM. But I do feel bad for Jane, honestly, because if you don't know what you're doing, it can be super easy to fall for a financial trap, especially when someone on the internet is hyping this up like it's the next toilet nightlight. Okay, maybe those aren't all that popular, but they revolutionized my nighttime trips to the bathroom, and that's all that counts. - Didn't need to know that. - Either way, the point is that what happened to Jane could happen to anyone if they're not careful. And if you look at the stats, it is happening to a whole lot of people.
In 2023, 13% of people with a 401k borrowed money from it and still haven't paid it back. So why are so many people taking money out of their 401k early? Well, some people do it to put the money toward other investments like our girl Jane did with that real estate flop. Others dip into the 401k because they're living paycheck to paycheck and they need cash to cover the gap. And for those people, it's a terrible shortcut that doesn't actually solve their cash flow problem.
And finally, some people use the funds in their 401k to help them get through an unexpected emergency like a job loss or car breakdown, which is called a hardship withdrawal. Now, those seem like valid reasons on the surface, but if you dig just a little deeper, you'll realize that they're big fat lies. So fat that if they sat on a rainbow, Skittles would come out. It's an old yo mama joke, if you're hip with it. You leave my mother out,
Now let me just say it loud and clear. Tapping into your 401k early is never, ever, ever a good idea. But there are two exceptions I'll get to in a minute. Here's why it's a bad idea. Now, number one, the taxes are outrageous. In most situations, when you make a withdrawal from a traditional 401k, those funds will get hit with two tax bills.
First, you have to pay income tax on the money you withdraw at your current tax rate. Since the money didn't get taxed when you put it in, it will get taxed when you take it out. Then, unless you're making a hardship withdrawal, you'll pay another 10% in a penalty tax. And that's what happened to Jane. She wound up paying a 35% tax on the 40 grand she took out from her husband's 401k, which is a $14,000 tax hit. That's got to be almost as bad as socks and Birkenstock.
If I had to rate them, it would go Sox and Birkenstocks, closely followed by 401k withdrawals. And if you think you can escape the wrath of Uncle Sam by taking out a 401k loan, think again. Those also get taxed twice, since you make the repayments with after-tax dollars, and you pay taxes on the money again when you withdraw in retirement. Now, I don't know about you guys, but I don't even like to pay taxes once. Tax me once, shame on you. Tax me twice, strike three.
Hard to argue with that one. But taxes aren't the only reason to leave that 401k alone. Problem number two, there's a ton of risk when you use your 401k funds for other investments, especially when that other investment is leveraged real estate. You see, when you use debt to buy an investment property, things can go south quickly, regardless of what that guy said on Instagram. When the first house Jane tried to flip didn't sell, she had no way to pay back the loan she had used to buy it.
Then to avoid foreclosure, she had to turn the house into a rental, turning herself into a landlord for a property all the way across the country. And that's a huge responsibility and a recipe for a whole lot of stress and financial disaster. Plus, when Jane tried the process again by buying a second house, which also didn't sell, she wound up doubling the damage. Problem number three, taking money out of your 401k early is like stealing from future you. And nobody steals from Pop Pop, especially Pop Pop. I'm watching me.
I'm watching me, brother. You see, the whole reason you put money into a 401k in the first place is so that when it's time to retire, you'll have money. You know, a nest egg that's big enough to give you a comfortable income even when you're not working or unable to work. But when you take money out early, that nest egg gets smaller and you unplug the power of compound growth, which is the biggest rub here.
That means your money's not only dwindling, but it's also not growing anymore. Kind of like me after the fifth grade. - Short king, aw. - Moral of the story, keep your 401k money in your 401k until you retire. No touchy. No touchy. The only time you should ever even consider a 401k loan or withdrawal is if it's literally the only way you can avoid bankruptcy or foreclosure. Otherwise, keep it simple and use the money you put into a retirement account for, you know, retirement.
Crazy concept. Now, if you're in a tough spot financially, there are much better options than taking money out of your 401k early. But before we talk about the alternatives, let me ask you, have you ever taken one of those Disney Princess Facebook quizzes? For real? If you have, your stuff is definitely somewhere it shouldn't be. And that's why Delete.me, one of the sponsors of today's video, is here to help. They work like their life depends on it to scrub your info from these data broker sites before someone does worse than troll you for getting Princess Aurora on that quiz. She sleeps the whole time.
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in the description. So what should you do instead of taking money out of your 401k? Literally anything else. Okay, maybe not literally. After all, I would not recommend making extra cash by buying an Elmo costume and taking pictures with tourists in Times Square. Been there, done that, got the sticker to prove it. Here's some actual good alternatives. Instead of taking money out of your 401k for an investment, invest for retirement inside of your 401k.
It's the perfect combination of sexy and cute, aka low risk, high reward, assuming you stay patient and give compound growth enough time to do its thing. Next up, instead of paying bills you can't afford at the end of the month with money in your 401k, just, you know, budget.
Budgeting is the biggest key to getting ahead of your expenses and making sure you always have enough money to put a roof over your head, food on the table, and gas in your car. And when you do a budget, it'll feel like you got a raise 'cause you're gonna find money that was floating away previously. So to download the budgeting app that I personally use, head to everydollar.com/george or click the link in the description.
Now, finally, instead of using your 401k to get you through unexpected money emergencies, build an actual emergency fund like your own money that's there to protect you. Not only will having an emergency fund give you peace of mind, but it will also keep you from ever needing to break open that retirement piggy bank early. You'll simply be able to cover the cost worry-free.
What did we learn today? Number one, never borrow from your 401k. Ever. Number two, never borrow from your 401k because a YouTuber told you to. Number three, never buy leveraged real estate. Number four, don't buy real estate across the country. Number five, don't do things with your money that you don't fully understand.
Number six, don't take giant risks close to retirement. And number seven, check in on your mom. Make sure she's not watching weird videos on YouTube about taking money out of a 401k to invest in real estate across the country. Instead, show her this video. The key here is not taking money out of the 401k, it's putting money in. And there's a clear way to know how much money you should have in your 401k by age. So check out this video next and get the scoop. I'll also drop a link in the description below. Thanks for watching. We'll see you next time.