Naughty Or Nice Has Financial Consequences

Were you financially naughty or nice to yourself this holiday season?

If you stopped contributions to your retirement plan or made a withdrawal from the plan to pay for holiday gifts and festivities you were naughty.

If you set boundaries for spending money you were nice to yourself.

Being Naughty

Retirement Contributions

You only have so many working years to save up enough money for retirement. You put yourself financially behind anytime you stop contributions to your retirement plans.

If you stop watering your flowers they stop growing, right? If you stop feeding your retirement investments they also stop growing. Investors sometimes put too much emphasis on the type of investments for achieving growth but growth of an investment also relies upon continual deposits.

When you stop contributions you also alter the effect that compounding has on your investments. Compound interest means that you earn interest on your reinvested interest. Compounding is very powerful if used properly; it allows your money to grow faster. The longer your money is invested the greater the effect.

Retirement Withdrawals

You lose much and gain little whenever you reduce your retirement plan balance due to a withdrawal.  Money sitting in your retirement plan is tax deferred. You lose that tax advantage when you withdraw it.  You also waste money on taxes and penalties.

The IRS established 401k’s and IRA’s so that individuals could save for their retirement on their own. Pensions were popular but individuals had to rely upon the stability and honesty of their employer to collect from a pension. These other retirement plans allowed individuals to rely more upon themselves.

However, the IRS still has to play big brother. When you withdraw money from a retirement plan before age 59 ½ the IRS feels that you are not using the money for it’s intended purpose, retirement. Therefore they feel the need to teach you a lesson.

Resist missing retirement savings for holiday spending

courtesy of dailyworldbuzz

IRS Lesson #1 – Income Taxes

Withdrawals from a retirement account before age 59 ½ is considered by the IRS to be income. If you made a withdrawal to pay for your holiday festivities you will have to include the amount of that withdrawal as income when you prepare your taxes in April.

IRS Lesson #2 – Penalty Payments

The IRS also feels obliged to penalize you since you did not use the money for the intended purpose. If under age 59 ½ you will be paying an early withdrawal penalty of 10%.

The IRS does not care that you used the money to buy an endearing gift for your spouse or a cute teddy bear for your child. If you are under age 59 ½ the IRS only cares that the money from your retirement plan withdrawal was not used according to the rules they established.

Being Nice To Yourself

You Practiced Frugality

Most gifts are given in appreciation for services rendered, as a thank you for friendship or out of love. That is charming and gifts have their place. The increased cost of a gift does not signify more appreciation or greater thanks.  It’s the thought that counts. Purchasing holiday gifts in moderation is the way to go.

Prior Planning

You were nice to yourself if you were able to avoid dipping into your savings or retirement investments to pay for gifts and gatherings. You planned ahead and squirreled away special money all year-long for these festivities. Good job.

Holiday Cheer To All

Overspending on others is being nice to them but not to you. Spending to point of putting your retirement plans in jeopardy is bad for you. To be able to reach retirement with enough money to afford it, retirement planning never takes a time out, even for the holidays.  Memories are priceless but a retirement without enough money will turn into a bad memory which will also be priceless.

If you weren’t as nice to yourself this year as you could have been, that’s okay, you can work on it. Like the Chicago Cubs fans always say “there’s always next year”.