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How New Parents Can Tap Their Retirement Savings Penalty Free

April 9, 2020 | Leave a Comment

Becoming a parent or adding a baby, while an exciting time, can also be stressful.  Of course, there are the sleepless nights and the round the clock baby care, but there are also financial considerations.  Many people are surprised how many expenses come with the birth of a baby.  And, you must also consider who will care for the child.  In the United States, maternity and paternity leave are not universal.  If you or your partner want to stay home for a few weeks after the baby is born (or adopted) and you don’t have maternity/paternity leave, you’ll either need to save money for it or find a way to cover your expenses while you stay home.  If you fall into the latter category, it’s important to learn how new parents can tap their retirement savings penalty free.

How New Parents Can Tap Their Retirement Savings Penalty Free

Thank the SECURE Act

The SECURE Act (short for The Setting Every Community Up for Retirement Enhancement Act), which passed in December 2019, now allows parents who’ve had a baby or adopted a child within the past year to take up to $5,000 out of their retirement account penalty free.  If each parent has their own retirement account, each individual can take out $5,000, meaning the couple can take out $10,000 total.

Normally, if a person takes money out of their retirement account before 59.5 years of age, they have to pay a 10% penalty.  The SECURE Act eliminates this penalty for new parents.

How New Parents Can Tap Their Retirement Savings Penalty Free

Photo by Jonathan Borba on Unsplash

Taxes Still Need to Be Paid

While you won’t have to pay the penalty, you will still have to pay taxes on the withdrawal.  Whether you withdraw $5,000 or $10,000 (if both partners withdraw $5,000), that money will appear as income on your tax form, and you will have to pay taxes on it.

Why You Should Carefully Consider Using this Option

While knowing how new parents can tap their retirement savings penalty free when you’ve had a baby is a nice option, you should try to avoid tapping your retirement for a number of reasons.

You Lose Compounding Interest

If you take $5,000 out of your retirement income, you lose the compounding interest that money was making for you.  Every month, that money was generating income, and now, it won’t be.

May Start a Dangerous Precedence

Retirement funds are for retirement.  Once you start pulling from your retirement, you may start doing that regularly.  It’s very easy to start thinking of your retirement account as a de facto emergency fund and pull money from it whenever you have an unexpected expense.  If you get into this pattern, you can easily decimate your retirement account.

I have a friend whose child had emotional issues, so my friend was desperate to help her child.  She sent him to residential treatment facilities and wilderness camps to try to help her son get his behavior under control.  Her insurance wouldn’t pay for these treatments, so she relied heavily on pulling money from her retirement account.  Now, her son is grown and still having emotional problems.  She, meanwhile, has emptied her retirement account and is starting over, trying to build a new retirement fund at the age of 45.  It’s not a good place to be.

Payback Options

Of course, you can take out the money, pay your taxes, and be done with it.  However, if you want to make up for what you had to take out, there are ways to do so.

Pay It Back Within Two Months

Check with your financial advisor, but for many retirement accounts, if you withdraw money from your retirement account and can return that money back to the account within two months, it’s as if you never withdrew the money.  You won’t have to pay taxes on it.  Think of it as a short-term, two-month loan.

This can be an excellent way to get a short-term loan, IF you can pay it back quickly.  This may help you if you want to take a one-month, unpaid paternity leave and know you can get the money back into your retirement fund the next month.

Pay It Back Overtime

Another option is to gradually pay it back over time.  Under this option, you still have to pay taxes on your distribution.  However, by paying back the money to your retirement account, you gain back the power of compounding interest on the money you originally withdrew.  With this strategy, your retirement account will be healthier and more robust than if you simply withdrew the money and never paid it back.

Other Times You Can Withdraw from Your Retirement Account Penalty Free

Beyond how new parents can tap their retirement savings penalty-free within a year of having a new baby or adopting a child, there are other times people can tap their retirement accounts penalty free.  However, before considering taking money out for any other reason besides having or adopting a child, consult your financial advisor.  Some rules differ depending on the type of retirement account you have (IRA or 401K).

Educational Expenses

You can tap your retirement account penalty free for related higher education expenses such as tuition, fees, supplies and books.  This money can be used for your own higher education, or for your spouse or children.

How New Parents Can Tap Their Retirement Savings Penalty Free

Photo by MD Duran on Unsplash

First-Time Home Purchase

If you’re a first-time home buyer, you can take $10,000 out penalty free to use as the down payment on your new home.  If your spouse has his or her own retirement account, he or she can also withdraw $10,000, giving you up to $20,000 toward your new home.

Medical Expenses

Some years you may incur significant medical expenses in a year (i.e. greater than 10% of your annual income).  During those years, you can take money out of your IRA to pay for medical bills without incurring a penalty.

Final Thoughts

The SECURE Act gives new parents flexibility when it comes to their retirement withdrawals.  However, keep in mind, whether you withdraw money for a new child or for any of the other reasons you can withdraw money penalty-free, you still will have to pay taxes.  You’ll also be losing the power of compounding interest on that money, which may be the biggest hit of all.

Melissa Batai
Melissa Batai

Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in Arizona where she dislikes the summer heat but loves the natural beauty of the area.

Filed Under: Money and Finances Tagged With: 401k, financially afford children, having children, IRA, Retirement

How We Plan To Financially Afford More Children

February 5, 2014 | Leave a Comment

pregnant and toddlerBefore I had any kids I thought I’d want a house full of kids. Three or four. Not necessarily because I want to be pregnant that many times or, if I’m being honest, spend that much money, but I want my kids to have each other when they get older. However, since having one child, I am surprisingly content. She’s a great kid who you’d think I’d be looking to clone ASAP but I’m not. As of right now, as our little one approaches 20 months, we have no immediate plans to extend our family.

However, if we can control it, we would like to have at least one more (in a few years). Sure we’re looking forward to having another baby but more than that, again, we want our daughter to have a sibling. Family is very important to us. Though I believe there is no real perfect time to have kids, there will always be something on your to-to list, you can still be more prepared than we were with our first.

We went into having our first sort of blindly. We had no idea how long, or if at all, we would take to get pregnant. It took a lot less than we ever expected which sort of threw us through a loop. We lived on a ”it will all work out” mantra and luckily for us, it did, barely. Come baby #2 we will be much, much more prepared.

 

Deal With Debt

Ideally we’re debt free by the time kiddo #2 is born, but if we’re not we will try to save enough extra money during the (ideal) nine month pregnancy to continue making our extra debt payments so my 12 month maternity leave doesn’t hinder our efforts. Unless someone has other plans for us, this is something we should be able to control. Having this sort of financial freedom will be liberating and allow me to have a stress-free mat leave.

 

Use What I Have

There will be huge monetary savings with kid #2 in the aspect that we don’t need any baby ”stuff” since we bought almost all gender neutral baby stuff (minus clothes). We chose to buy a lot of quality baby clothes which we kept so if we have another girl, there will be additional savings with cloths. If we have a boy, I’m confident we can sell the clothes we have to get a good start on a new wardrobe for a little man.

 

Be More Selective

I’ll be way more selective about what I buy. There was a lot of baby stuff and mom necessities I ran out and bought out of sheer ignorance and barely used most of it. Now that I know what I’ll want and need I will be able to better predict how much money we will really need. I’ll also utilize family and friends in the sense that if it’s an item I can borrow instead of buy, I will.

 

Diapers

I’ll try cloth diapering. I opted out of cloth diapers this child simply because I was scared and overwhelmed with the whole process. I have friends who have since started cloth diapering and I’ve done research myself and it doesn’t seem so overwhelming. For an upfront cost of approximately <$1000 I’ll definitely give it a shot. If it doesn’t work out I won’t worry since there is a large market for second-hand cloth diapers regaining a large portion of what I put into it.

 

Breastfeed Again

I was fortunate enough to be able to breastfeed our first for over a year. If I can do it again I would love to for the many benefits and huge cost savings!

How did you proceed with children after your first? Does it get any easier?

Catherine
Catherine

Catherine is a first time momma to a rambunctious toddler. When she isn’t soaking up all that motherhood has to offer, you can find her blogging over at Plunged in Debt where she chronicles her and her husbands journey out of debt. You can also follow her on Twitter.

plungedindebt.com

Filed Under: Money and Finances Tagged With: financially afford children, raise children, the cost of children

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Basic Principles Of Good Parenting

Here some basic principles for good parenting:

  1. What You Do Matters: Your kids are watching you. So, be purposeful about what you want to accomplish.
  2. You Can’t be Too Loving: Don’t replace love with material possessions, lowered expectations or leniency.
  3. Be Involved Your Kids Life: Arrange your priorities to focus on what your kid’s needs. Be there mentally and physically.
  4. Adapt Your Parenting: Children grow quickly, so keep pace with your child’s development.
  5. Establish and Set Rules: The rules you set for children will establish the rules they set for themselves later.  Avoid harsh discipline and be consistent.
  6. Explain Your Decisions: What is obvious to you may not be evident to your child. They don’t have the experience you do.
  7. Be Respectful To Your Child: How you treat your child is how they will treat others.  Be polite, respectful and make an effort to pay attention.
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