In a recent episode of “The Ramsey Show,” renowned radio host and personal finance expert Dave Ramsey delivered a straightforward message to a young woman from Orlando, Florida. Ramsey bluntly stated, “Ouch. You’ve screwed yourself. You’ve really made yourself a mess.”
This response came after the woman, identified as 28-year-old Selena, shared her recent financial decision to withdraw $26,000 from her 403(b) retirement account to fund a down payment for home construction, with the intention of accommodating her growing family’s needs.
Ramsey’s reaction was laced with skepticism as he said, “I’m scared for you. I hope you get out of it with your skin intact, but I’m not positive you’re going to.”
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Selena and her husband had a combined household income of approximately $155,000. Recently, they welcomed a new baby into their family and faced a pressing need for more living space. While they had a home they intended to sell, the urgency of their situation prompted Selena to withdraw funds from her retirement account for a down payment on a new home. Seeking guidance on how to recover from this financial setback and looking for a set of gradual steps to take, Selena called Ramsey for advice.
Ramsey explained a critical time frame for Selena’s situation: If she didn’t replenish her retirement account within 60 days, she would face significant financial penalties, including the 10% early withdrawal fee and what he referred to as the “take rate.” That would result in a total loss of 40% of the withdrawn funds, equivalent to approximately $12,000 that would go to the government. Ramsey emphasized the importance of acting swiftly to avoid this substantial financial hit.
It’s important to highlight that Ramsey, despite his expertise in personal finance, is not a qualified tax professional. He directed Selena to seek advice from investment advisers through his website. Yet, people facing similar predicaments might consider consulting a certified public accountant or tax attorney for more comprehensive guidance.
What led to Selena’s financial predicament, according to Ramsey? He pinpointed several pivotal issues:
Impulse buying: Ramsey criticized Selena for impulsively tapping into her 403(b) retirement funds to finance her new home before selling her current one. He cautioned that surging interest rates could create a challenging selling market, potentially leaving Selena with two mortgage payments. Ramsey recommended a more cautious approach: selling her existing home first and temporarily residing in an apartment while transitioning to her next property. In Ramsey’s estimation, the retirement withdrawal was akin to taking out a loan with an astronomical 40% interest rate. He further indicated that Selena should anticipate a significant tax bill, amounting to approximately $12,000.
Tax implications: Ramsey briefly discussed the tax consequences of Selena’s decision, including a 10% early withdrawal penalty and income taxes levied on the withdrawn amount. He did not delve into potential exceptions to the 10% penalty or the impact of the standard deduction for married couples filing jointly, factors that could considerably influence Selena’s tax liability.
Fundamental rule: Ramsey underscored a fundamental financial guideline — retirement funds should exclusively serve retirement purposes. He cautioned that straying from this principle would result in substantial penalties.
Ramsey’s primary counsel to Selena centered on mitigating impending tax penalties by replenishing her 403(b) account. He advised Selena to explore all feasible sources of cash, including her daughter’s 529 education savings account, to restore the depleted funds.
Ramsey did not provide a clear resolution for covering Selena’s down payment once her 403(b) account was restored.
Ramsey’s guidance to Selena boils down to a fundamental financial principle: Stop buying things you can’t afford and buying them out of order.
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This article ‘Ouch. You’ve screwed yourself. You’ve Really Made Yourself A Mess’ – Dave Ramsey Criticizes Caller For This Common Homebuying Mistake originally appeared on Benzinga.com
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