Ep #117: Emergencies and Opportunities: Assessing Where to Turn for Money in a Time of Need

Benjamin Haas | May 9, 2024

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00:00:04 Benjamin Haas:

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!

00:00:29 Adam Werner:

Hey Ben, podcast time. Here we are yet again. How are you?

00:00:35 Benjamin Haas:

I'm doing well. How are you today?

00:00:38 Adam Werner:

Oh, just peachy. It is officially peachy. It's spring. It's warm out when we're recording, it's nice.

00:00:48 Benjamin Haas:

These bald spots for those that are watching on YouTube. They're a little pink. Maybe not peachy pink, but peach.

00:00:57 Adam Werner:

Yeah. You got a little sun. That's good.

00:00:59 Benjamin Haas:

That's soccer season, a lot of soccer to watch.

00:01:02 Adam Werner:

Yeah. A hundred percent.

00:01:04 Benjamin Haas:

Go for it.

00:01:05 Adam Werner:

So today's topic we've had a few clients recently, I'll say within the last few weeks, few months, either come up with some opportunities, purchasing another property, adding, expanding a business or emergencies, needed a bigger chunk of money to do a project at the house or you name it. But then we kind of go, the question is often, well, how do I best access the savings that I have or do I do a loan? What are the tradeoffs? Like, just help me try to figure out what's going to be best for my situation. So, we thought it would be a good topic to share with a lot of people because I don't think that's uncommon for things to pop up in people's lives, good or bad, and just kind of give some thoughts on how we approach that.

00:01:55 Benjamin Haas:

Yeah, I think whatever the scenario is that you require money, we have to kind of assume that you don't just have a bunch of savings set aside that's easily accessible, right? And this, to your point, it can be emergency opportunity but let's assume you are also at a phase in life where you've got options. So that is to say you're not just starting out, right? You've got and we'll go through some of them. I've got retirement accounts. I've got equity in the house. I've got loans, I've got people I could borrow money from, we'll go through all of them. But I think for the direction of the podcast, let's go through kind of like pros and cons of these things and always acknowledge that the answer is going to be pretty particular to you, right? It's not like we're going to give you some secret sauce here, but it's just to your point, super common. Right? Whether whatever phase of life you're in, you can plan for everything you want to, but at some point, there's going to be a curveball, right? And you can think about your life over the last 5, 10 years. There are these times in life where you get the curveball. I've got to access some money. I don't want to panic, but hey, Adam, Ben, Holly, where should I go? It's a super fair question and we just want to go through kind of the do's and don'ts.

00:03:10 Adam Werner:

Yeah. So where should we start?

00:03:15 Benjamin Haas:

Where do you want to start?

00:03:16 Adam Werner:

Well, the one client example in my head most recently, husband and wife, both still working, bought another property in Florida; had savings but not enough savings to buy this property outright. So, then the question was, we both have, or one of them has a 401k. Wouldn't it make sense to just take a loan for my 401k? It's a great idea. Here's why I think I should do this. You know, you're paying yourself back versus taking a loan from a bank, right? You're still paying interest on that, but you're putting it back into your account and I think a lot of people see that and think I'd much rather pay myself then pay interest to another entity, right? To pay a bank my interest. That's money I'm never going to get back again. So let's do the 401k loan. But I think what a lot of people don't realize is when you are paying yourself back into that 401k, you are using after-tax money. So, you are taxed on that in your paycheck before that money goes back into the 401k, the biggest downside to that is you're theoretically going to pay taxes on that money you're paying back twice. You're putting after-tax money in retirement, when you go to take a withdrawal from a pretax 401k, you're going to pay taxes on that withdrawal again. So, for a lot of people that's the biggest reason to not do the 401k loan because at times my savings is often built up in a retirement account. Can I just access this as needed? And yeah, not worry about paying somebody else's interest

00:04:52 Benjamin Haas:

Yeah, and that's where I love when we get questions like this from clients, like, wouldn't that make sense? Because it makes us have to think about the other parts of their planning that they're probably not thinking about. Right? Because if the paying myself back feels better than a loan at the bank, you brought up the tax side of it. I would also want to think opportunistically that depends, especially if you're a little bit younger, you're losing to a certain extent, the ability for that 401k to continue to compound in good markets by taking a chunk out, right? I know we will often try to give education around this and the term of the goose that's laying the golden eggs. And if you're able to have those eggs compound, you're just putting yourself in a much better spot later in life. So I get the concept of the loan. I think the cons in most cases would outweigh the pros there based on taxes and compounding of your savings over time.

00:05:51 Adam Werner:

Yeah. So I'll tee the next one up because I think it's very similar. I'll tee it up for you. If I don't have a 401k but I have an IRA, can I just take a withdrawal from my IRA and essentially not have to pay it back? I could just take money out of my IRA, pay some taxes, and now I have access to these funds that I need.

00:06:15 Benjamin Haas:

Maybe. So let's talk logistics and then give me your opinion. In the same vein, yes, maybe we're losing some compounding dollars there. The other con might be depending on your age. If you're not 59 and a half, there is tax penalty for accessing that money. That doesn't exist in the 401k, right? So if we were in an emergency situation, then maybe I'd say 401k before IRA.

00:06:40 Adam Werner:

Sure. Yeah!

00:06:42 Benjamin Haas:

But I would also point out the IRA might be quick access to money if you could put it back. So let's create that planning scenario where you need quick access to money and let's say you're selling your house and trying to buy this other house, but you're buying this house before you can sell your house. You can pay back that IRA money free of penalty and free of income taxes if you can pull it off in a 60-day window, right? So that's pretty tight. I think these rules are right. Yeah, I hope I'm not old here. No, you're correct. These rules change. You have a 60-day window to put that money back. So, from that standpoint, depending on the planning situation, that may be quick access to money without having to get some sort of other loan but that's 60 days is a pretty tight window.

00:07:29 Adam Werner:

Yeah, and in that scenario, if that was the intent and you happen to miss that 60-day window, now it's as if you took that distribution, it's going to be fully taxable, right? If it's assuming it's coming from a traditional IRA, a pretax IRA. So not only are you potentially paying a 10 percent penalty if you're under age 59 and a half, you're paying the taxes. Again, now you can't get it back in and your comment on that loss of, again, future compounding returns over time. So not ideal but there could be a very specific situation where you could, in theory, get access to your savings in a retirement account and put it back in a really short window and really not feel too much of a negative impact but you'd have to be really sensitive to that timeline for sure.

00:08:19 Benjamin Haas:

So then if we're not kind of borrowing from our own retirement. What would you say when people like, again, create a different scenario if you want to but maybe it's not for a primary property but I need to get access to money. What would you say about access to something like a home equity loan?

00:08:37 Adam Werner:

Yeah, I think it certainly depends on the interest rate environment. So right now I'll say, I think and it's going to vary from bank to bank, but I think HELOC right now are eight-ish percent, give or take a little bit, eight to nine. Often, we like to compare that if somebody's faced with, do I take it for my investments or do I take a loan? We'd like to look at that interest rate and try to compare to what do we think we can reasonably expect from our investments over a long period of time. Just compare those numbers. If you can borrow for less than you expect to earn. Then oftentimes it makes sense to continue to leave your money invested, allow that to grow. It's the compounding interest over time, even though you may pay a little bit of interest. If it's the other way and you're paying a heck of a lot more interest than you can hope to make on your savings, then maybe it doesn't make sense to take the loan as much. I think it really does depend on the interest rate environment and if it is a home equity line of credit, in theory, that is secured, right? It's collateralized to your home so that at some point there is in theory, you can get a better interest rate than just kind of going out and getting a using a credit card or a personal that may have a much higher interest rate and feel a little bit worse from an interest paid perspective.

00:09:59 Benjamin Haas:

I think I would also like in the scenario you gave; they bought a second property but we would ask qualifying questions to that. Is that a use property for you? Or are you looking at that as an investment? And look sometimes like it is what it is. To have money serve the purpose that I wanted to serve in my life, a loan is a loan when I need to take it. But if you were really looking at it from an investment standpoint, well, we need to compare potential return on said property versus your savings over a longer period of time too. So just I want to say that again, it's even that, is more situational than just all loans are a bad idea right now because interest rates are high. I don't want to make it sound like that.

00:10:43 Adam Werner:

Well, and to that end, maybe backtracking a little bit and thinking of the IRA as the example of, hey, I'm going to take money out of my own IRA. I think everybody has a different feel on paying interest. Where maybe I'd rather pay interest than pay taxes on a withdrawal but oftentimes and again, it's all situational but oftentimes, the interest paid on a loan could pale in comparison to the taxes that you could pay on a withdrawal from a 401k or an IRA. Even though you know viscerally the thought, again, this is just some people have really strong feelings. I just hate to pay interest to somebody. I don't want to have to borrow money and owe somebody something and pay them for that privilege. But sometimes that financial burden may be less on the interest side than the taxes that may be owed, accessing your savings outright.

00:11:39 Benjamin Haas:

So then let's pivot that, you know, kind of paying the bank. Getting some sort of personal loan, I think, generally speaking, we would say not the first place you want to go because to your point, if that's not collateralized, that's going to be a higher interest rate. But then, if I'm not going to borrow money from an institution, what would you say about the idea of, if you have the opportunity, if you are in a situation where there are people in your life that would be there to support you, what about borrowing money from family?

00:12:11 Adam Werner:

Yeah, that can be a tricky situation and I feel like we did a podcast on that

00:12:16 Benjamin Haas:

Not too long ago.

00:12:18 Adam Werner:

Yeah, maybe a year or ish ago. You think it's sooner than that?

00:12:24 Benjamin Haas:

I just said not that long ago. You said a year anyway.

00:12:27 Adam Werner:

Well, time is all relative. Speaking of relatives, borrowing from family. So I think it can be a win in many situations, to your point, if there is a family member that has maybe some excess savings that could be allocated to a loan to a family member, you can have some peanut butter, take some chocolate and let's make a Reese's peanut butter cup here where everybody's happy that the person with the excess savings can charge an interest rate. By the way, the IRS says you must charge a minimum interest rate for that to be, you know, up and up in the eyes of the IRS that it's not a gift. But then for the person also borrowing that money from family, they, in theory, could access some capital at a lower interest rate than going to the bank or doing a personal loan where those interest rates may be higher. But I think the important part in all of that is making sure that there is clear documentation on that transaction. Again, maybe this is where we'll point back to that other podcast. If people do want to go back and hear more of the nitty gritty details of, what we would suggest there.

00:13:36 Benjamin Haas:

So then let's think about planning opportunity here on both sides of that equation. I know that I've been having conversations and you have too, saying, hey, well, cash, rates of return right now feel really attractive, 4%, 5%. But when you go and look to try to get a CD or something, that feels longer term you're not able to get that 4 or 5% for a longer period of time. Right, because we're all anticipating that at some point, the federal funds rate is going to drop. So, I believe there may be an opportunity if you need to go borrow some money, but you need to pay it back over a 5, 10-year period that you don't want to go and borrow that at 8%. But somebody in your family may want that 5 percent rate of return for longer than the next 12 to 18 months. Yeah, that's where your idea here of peanut butter and chocolate can come together for Reese's Peanut Butter Cup. We may be in that neat environment where it really does work for everybody. As long as you have that documented, again, good relationships, nobody's taking advantage of anyone. I can see that being a really good positive for both sides.

00:14:45 Adam Werner:

I think, then the last one we kind of touched on earlier that, all of these different examples of places to go is assuming there isn't just a huge pot of excess savings that is readily available and accessible. But we are seeing with interest rates, being higher than they have been within the last decade or so. People have been taking advantage of CD rates at the bank and even to your point, if it's not, locked up for two or three years, again, we're kind of seeing that sweet spot of right around a year is kind of the maximum interest rate that you can earn, but even that starting to trickle shorter and shorter that we've seen here recently. It's that trade off on, oh, I have this CD, it isn't going to mature for six more months but I kind of need this money now. What is that impact? More often than not, you end up giving back a little bit of that interest. I know it's not as if you lost all of it. It's not as if your money is not really accessible. The tradeoff is it may not earn as much as you had anticipated. If you're going to break that contract a little bit early.

00:15:49 Benjamin Haas:

So light bulb just went off the word of caution in the do's and don'ts camp here. If you were, you have a good banking relationship, you've had some CDs, maybe in the past, if you were maybe given the opportunity to get into a fixed instrument, like a fixed annuity for a little bit of a longer period of time. Liquidation rules are completely different there. Oh, just word of caution on taxation. Again, being of certain age, 59 and a half, please do not look at that bank instrument the same way you would look at a CD, where now, okay, I'm out of my surrender period on this fixed instrument. I took out a year or two ago. Yeah. Taxes are very different. Taxes, ordinary income, don't want penalties. That's just, it's a different animal so word of caution there.

00:16:37 Adam Werner:

Yep. No, fair point.

00:16:38 Benjamin Haas:

All right. So I guess moral of the story and maybe give me your big takeaway here. I know we say it often, lots of different planning variables, lots of different situations for different people at different times. The answer for you is going to be, it depends. But I think, again, the important part is just let's weigh the impacts of any of those options that may be available to you. And that's why it's so important, I think, to have open conversations with your planners, if you're working with us, great, before you go and make any big decision when it comes to liquidating something or borrowing from an institution.

00:17:17 Adam Werner:

Yeah, I don't have much to add to that. That was very well said.

00:17:21 Benjamin Haas:

Well, thanks pal. Hey, glad you're doing peachy. Until next time, tet's go get them.

00:17:34 Adam Werner:

Sounds great. Go Phillies.

00:17:37 Benjamin Haas:

Bye.

00:17:37 Adam Werner:

See ya!

00:17:44 Benjamin Haas:

Hey, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

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Ep #117: Emergencies and Opportunities: Assessing Where to Turn for Money in a Time of Need