401K Hardships

In this episode of 'The Heart of Your Money', Joe Yocavitch discusses the increasing trend of hardship withdrawals from 401k accounts and the implications of debt on financial wellness. The conversation highlights the importance of saving for retirement while managing debt effectively. Joe and his son Michael introduce the 'Debt to Capital' program, which aims to help clients pay down debt more efficiently and build a tax-free financial future. The episode also touches on the challenges of balancing family support with personal financial health, emphasizing the need for strategic financial planning.

Transcript

SPEAKER_01 0:00

Welcome to the Heart of Your Money with Joe Yakovic, president and founder of JML Financial Group. We hope today's show can help you on the road to your financial wellness. Now, here's Joe Yakovich and the Heart of Your Money. Hey, Sari, how are you today?

SPEAKER_00 0:16

I'm doing really great. I recently found some information from Vanguard, and they reported that the percentage of people taking hardship withdrawals from their 401k accounts went up again in 2025. But they're also reporting that higher percentages of money are being put in these 401ks. So I wanted to ask both of you guys, this seems counterproductive to me. If we're putting more in just to take more out with penalties, that doesn't seem like the best way to say for retirement to me.

SPEAKER_04 0:47

Well, you know what? The the biggest concern because of inflation and volatility and this job market, you know, people are either not saving enough or saving in the wrong spots. You know, you hear the uh the slang, you know, they the paycheck to paycheck. Unfortunately, you know, they haven't planned for the unexpected. You know, a lot of folks do this in terms of 401ks and putting money away on an ongoing basis. The only reason why they do that is because it's taken right out of their checking account or out of their payroll account. If they had to arbitrarily take the money from their pocket and invest it, that would never occur. So you understand the dichotomy around this strategy and around the things that are happening to them because they're they're running short, and the first place they have the money is the 401k. So the hardship issue really marks a major increase since 2018, specifically because of the you know, the market going up and down and taking advantage of. And I have clients, believe it or not, that are actually have enough money, but they actually withdraw dollars out of their 401 to buy things. And the thing might be a car or a down payment on a on a home. They don't realize what the cost is to do that. Remember, if you are in a 401k and you borrow, that's one thing, but you have to pay it back after tax. And the money that you're been removed from the 401k, it's not growing any interest because it's no longer there. So it's a double whammy when it comes to when you're taking money from a 401k, not a good strategy. It really isn't.

SPEAKER_00 2:38

I have to stop you because I want to make sure I'm understanding this correctly. If you take the money out, you're paying taxes, and then you have to put the money back in. And let's fast forward 20 years down the road, now you're taking RMDs, you're paying tax on that money again.

SPEAKER_04 2:51

Double taxation, exactly. And when I explain that to people, they look at me like, yeah, I never thought of it that way. Well, you better start to think of it that way because that's exactly what they're doing. So, what we have done, Sari, is that we've realized that people in general need to address debt. That's the problem we're faced with. If we don't take care of their debt so they can save simultaneously. Now remember, I've been saying this forever. You know, when people say, How much money should you put away? The rule of thumb used to be 10%. I never said 10%. I always would say 15 to 20% automatically. Matter of fact, the gym the other day, I walked in, the young guy would talk and I said, and the owner was in the was listening to me. I said, remember something. You make a dollar, I said, Are you paying tax to him? He says, Yeah. I said, You make a dollar, the first thing you should do is take 20 cents of that dollar and put it away. Forget about it. Put it into a retirement plan, put it into a saving plan. And I gave him some ideas on where they should put the money. And at 80 cents, you then you should live the lifestyle that you're accustomed to. It's real simple, but you gotta have a real focus and a real habit of doing so. We started to realize that debt is an issue with our clients. So, what we end up doing is we put together a debt to capital, and which Michael's gonna talk to us about this a little bit today, but more importantly, he's going to also write part of his book specifically on this, and I'm gonna add that portion of the book in from the heart of your money, and I'm gonna add another chapter specifically about debt to capital. Michael, you want to talk about this a little bit?

SPEAKER_03 4:38

But yeah, I mean, with how you guys were talking about, you know, putting money away and taking money out and and really, you know, getting the the best out of your own dollar is is a big thing that we like to see see with our clients. We don't like to have any wasted dollars. Like my dad just said, double taxation. It's not what we want our clients to be doing. Um, but during that entire process, we're we're seeing how how debt really holds people back in this day and age. Um, you know, if me and you were at a bar series, we would not talk about debt. You know, you wouldn't say, hey Michael, guess how much debt I'm in. You know, we wouldn't we wouldn't have that conversation over sharing a couple glasses of wine. That just wouldn't be a thing. So we're noticing that people really they don't like to talk about it. But if we have this type of conversation with them, they'll want to talk about it with us and and we'll actually realize, okay, all of this amount of debt is just holding you back. You know, once we can overcome this, then you're gonna be so much more financially free to be able to put money away in a Roth account, or if you want to be able to fund a life insurance, or or if you want to, you know, diversify your portfolio and start putting money in the market to have your money grow for your future. Those are things that become so much more easy, or you could say become so much more doable when you know all of your student loans are gone. You know, that's that's a big thing. So we're noticing, and we're we have a software called debt to capital, that there is a much, much, much better way to pay down the debt than borrowing from your 401k, especially if you're not able to really pay it back. You know, taking money out during your growth phase can hurt you so much more than people really think. It can hurt your long-term portfolio in ways that they might not understand at this moment.

SPEAKER_04 6:35

And you're and understandably, there you just said that, Michael. There the money is gone, so there's zero growth on the money it's gone.

SPEAKER_00 6:44

You're like robbing from your future.

SPEAKER_03 6:45

You're robbing from your exact what Sari just took the the words out of my mouth. And one thing that we've learned is debt is so easy to get into, but it's so much harder to get out of. You know, it's so easy to max out credit cards, and it's so easy to buy things that you want, but it's kind of weird how hard it is to get out of that hole that you've dug yourself.

SPEAKER_00 7:09

Well, and it's not just yourself that digs it, it's the credit card companies that make they just keep throwing the dirt on top of you with those interest rates.

SPEAKER_03 7:17

Yes, and and obviously, you know, you want to maybe put a vacation onto your credit card or or anything. And in the moment it feels good. But after that, you're like, what am I doing? You know, just to enjoy myself for a week, I had to go into all I had to go just to enjoy myself for one week, I had to put myself in months of debt. Like, that doesn't make sense.

SPEAKER_04 7:43

And the debt we're talking about, and Michael, you mentioned it's embarrassing, but it's 20 plus percent interest they're charging. And it's also when and there's also good debt and bad debt.

SPEAKER_03 7:55

And and and everybody has their own version of that. I think you know, good debt's gonna be a mortgage. If you have a home that you want to live in, you're gonna have that debt. Um, you know, student loan, you can look at that in a in a different type of light because you know, if you wanted to be a pharmacist, well, you have to go to school to go be a pharmacist and make yourself a great income. But you have to take on debt for the you know the journey that you want to be a pharmacist. So there's certain things how we look at it and and and really how debt can either be used as a beneficial aspect of your life, or how we we see more of it as it's really holding you back. So having too much debts, you know, helps not helps, but it doesn't allow you to save money for your future, which eventually impacts your retirement. So what my dad said earlier, it's called debt to capital. We have implemented a program that not only gets you out of debt much, much sooner than you normally would have, it also provides a positive financial capital. So when you're out of debt at the end of the day, in most scenarios, you go right back into debt to be able to live that lifestyle that you want to live. But with our new program, at the end of the whole time that you're out of debt, you have a tax-free bucket of money sitting and waiting for you. So when you're finally over that big hump that we call debt, now you won't have to live that roller coaster lifestyle of into debt and out of debt and into debt. With us working with myself and Joe, you know, use the software, use the program how it's supposed to, and debt to capital will help you get out of debt so much more faster than what you really would have thought. And at the end of the day, you will have a tax-free amount of money that you can use for your future, future spending, future saving. Doesn't mat doesn't matter how you look at it, but you will not have to go back into debt when other situations are kind of like that. We want you to go out of debt one time and moving forward looks very clear and very easy for you.

SPEAKER_00 10:01

Have you had clients go through this whole process with you and then get to the end and have this money and realize that they don't have to go back into debt? Have you seen amazing things happen in people's lives because of that?

SPEAKER_03 10:13

We just started this program about two years ago. Okay. So our clients that we have that are going through the program are extremely happy. I would say probably the the greatest you could say before and after is my dad has a very, very longtime friend and client. He's a doctor. He was looking at 20 plus years of debt before this software and before the program was showcased to him. When he did everything, everything was perfectly placed in front of him. He started the program. Now he'll be out of debt in less than 10 years. Wow, in a few years, we made a and an 11-year difference in his life, going from 21 years to I believe it was nine and a half years.

SPEAKER_04 10:56

And this guy happens to be a surgeon, just retired not too long ago, in his 70s, and he was paying for some of his children's uh cars and some other things. And when Michael came in about two years ago, and we sat down with a doctor, it was it was amazing, and he loved it and he and he implemented it, and he he's seen the progress early on, and you can see using this strategy you know far exceeds anything else that will get people out of debt as fast as possible.

SPEAKER_00 11:31

And potentially into retirement faster if the debt is gone.

SPEAKER_04 11:35

Correct. And get him to save more money faster. That's the premise behind it is get him to save money and get him out of debt because now he can save all that money that he was paying for debt, and you know, it could be anywhere between fifteen hundred, two thousand, three thousand a month. Guess what happens? That turns around, and that money is back in his pocket, and now he's able to save those dollars for his future.

SPEAKER_00 12:00

You were talking about your friend who's this Dr. Joe, and one of the things he was doing was paying for the kids in the cars and probably college debt from them. This is something that I see a lot in my personal experience. People want to do for their family because that's what's so important to them. But at the same time, you a lot of times kind of cut yourself off of the knees when you're paying for your kids' things because there's not enough left for you to plan for your retirement. Do you see that a lot?

SPEAKER_04 12:26

You wanna you want to answer this?

SPEAKER_03 12:28

The fact that my father wants me to answer this question says that he's doing it for you so much right now. And I love him. But no, I can answer this. Um you make my life very fun. Um but I I bet as my father, you know, he wants to give me more than he was given. You know, that's that's a fatherly and motherly, I feel like, instinct that that people have as they raise their children. Uh I can see that my dad and my mom are blessed where they're able to do kind of both, that they're able to give uh me and my sister help when we need it. They have planned, you know, 40 plus years, maybe even more, to make sure that they're able to help me in certain situations. So I know that it's important for my father and my mother to be able to help other than myself, my sister as well. But but on the flip side of that, they're also making sure that they're planning for themselves each and every day. They're able to help me and my sister out because they have planned for their future.

SPEAKER_00 13:32

But there's a flip side of that to people who don't have the same resources that your parents have and haven't planned as well as your parents have, being in this industry, Joe and Lynn. And then they want to still do for their kids, and what the kids don't understand is that at some point that's gonna flip. And there might come a time where because the parents gave so much to the kids and didn't keep anything for themselves, the kids then are in a position where they need to take care of the parents, and there's no guarantee that they're gonna do that.

SPEAKER_04 14:01

Absolutely. And that's something that I sit down with the parents and let them know that. You know, that's the hard questions that I have to, you know, get that on the table immediately. That's like the tough love. Oh, it's a real tough love because you know they're willing to spend all kinds of money for education. And I explained to them, I said, are they gonna pay you back on the money you gave to them? Well, you have enough because that's time value of money that you're taking out of the whole realm. And guess what? You're now saying to me, Oh, I don't have the dollar amount that I thought I was gonna have. So that's a conversation that we were able to pretty much put together for clients, how much they should be uh giving to their children, where they should be uh positioned for this with our own children and with our clients' children. So it's something that we always talk about, part of our overall plan when we're talking to clients. Again, going back to what I said earlier, Sari, it's it's some of it for me, it's common sense, it's experienced of listening and and talking to um clients of many years and giving my wisdom to them and let them know what the best benefit would be. And they come back sometimes and say, we're gonna follow your advice to a T because you're using it on yourself and your own family.

SPEAKER_02 15:19

Securities and Investment Advisory Services offered through Integrity Alliance LLC, member SIPC. Integrity Wealth is a marketing name for Integrity Alliance LLC and is not affiliated with Integrity Wealth. Joe Yakovich is an investment advisor representative and registered representative with Integrity Alliance LLC, a registered investment advisor and member SIPC. Integrity Wealth is a marketing name for Integrity Alliance LLC. Integrity Wealth is not an affiliated company. Opinions expressed on this program do not necessarily reflect those of Integrity Wealth. The topics discussed and opinions given are not intended to address the specific needs of any listener. JML Financial Group does not offer legal or tax advice. Listeners are encouraged to discuss their financial needs with the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results. Fixed annuities are long-term insurance contracts, and there is a surrender charge imposed generally during the first five to seven years that you own the annuity contract. Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate on some participation if any of a stock market index. Such contracts have substantial variation in terms, cost of guarantees and features, and make up participation or returns in significant ways. Investors are cautioned to carefully review an indexed annuity for its features, cost, risks, and how the variables are calculated. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income, and if taken prior to 59 and a half, a 10% federal tax penalty. Converting an employer plan account or traditional IRA to a Roth IRA is a taxable event. Increased taxable income from Roth IRA conversion may have several consequences, including but not limited to a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. Rebalancing reallocating can entail transaction costs and tax consequences that should be considered when determining a rebalancing reallocation strategy.