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So Money with Farnoosh Torabi
1953: Ask Farnoosh: Inheriting a 401(k), Emergency Fund vs. Retirement, and Tax Identity Theft
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So money episode 1953 ask Farnoosh. You're listening to so Money with award winning money guru Farnoosh Tarabi. Each day get a 30 minute dose of financial inspiration from the world's top business minds, authors, influencers, and from Farnoosh yourself, looking for ways to save on gas or double your double coupons. Sorry, you're in the wrong place. Seeking profound ways to live a richer, happier life. Welcome to so Money. Hey everybody. Welcome to Sew Money. It is AskFarnoosh Friday. I'm Farnoosh Tarabi. It's Friday, so we're going to get into your questions about money and investing and work and all the decisions that come with trying to just put one foot in front of the other, right? Build a financial future at the same time. This week we're tackling some really important questions from inheriting a 401k and what to do when that happens. Do you have to start taking distributions right away or can you maybe roll that money into an ira? We're also going to talk about the dilemma that I from a lot of listeners right now. How do you balance saving for an emergency fund while also trying to save for retirement when your budget just can't stretch to do both? Does one take priority over the other? And if so, how do you make that call without feeling like you're falling behind? And then finally, it's tax season and a listener wrote in with a pretty scary situation that their tax return was rejected and now they're worried that someone may have already filed fraudulently using their Social Security number. And so what steps should they take immediately to protect themselves and get things sorted with the irs? All right, but before we get to the mailbag, I want to just take a moment to acknowledge something that's been weighing pretty heavily this week for a lot of us, myself included. Many of you have reached out through your texts, your emails, social media messages, in person, asking, hey, how are you feeling about the war in Iran, Farnoosh? And I just want to say I really appreciate that. I really do. And it was in many cases is like unexpected. And the honest answer is it's complicated. This has many, many layers. If you talk to my parents in the beginning of the war, which was about seven days ago, they were rejoicing. Like, I think a lot of people who left the country and even people who are still in the country were feeling at the time that finally there was some traction, there was like some hope maybe. And I can't blame them for feeling that way. Although there's Also, like the intellectual side of brain that's looking at history and going, this usually doesn't end well for countries like Iran, but I'm going to let them relish in this moment, and I hope so, too. I hope that there is a day where I can go back, my family can go for the first time. My kids have never been to Iran. And by the way, people who have come up to my kids at school and said, how's it going? How are you? How is your family? That's so cool. Thank you so much for doing that. They were also a little caught off guard. But very much appreciate the sentiments and the kind words. But as I say, this has many layers. There's no bad feelings or wrong emotions tied to this. It is devastating. It's messy. There's sadness, immense sadness. Anytime there's war, the human cost is staggering. The loss of life, Americans, Iranians, civilians in neighboring countries. It is absolutely heartbreaking. We're only a week in, too. This could last months, years. And there's a feeling of helplessness watching this from afar. We aren't in touch with anybody on the grounds there. We're getting our reports from the same way everybody else is here in the States, from news organizations. Knowing people that you care about are connected to what's happening and realizing how little control any of us have really over these global events is really hard. And I'm also confused. I'm very much in a confused state. I find myself asking the same questions many of us are asking right now, like, why is the United States getting involved? What does the end game look like? And what does this mean for ordinary people both there and here? And like I said, amidst all of this range of emotions, there's also a tiny, fragile thread of hope, you know, that maybe moments of upheaval can eventually lead to something better for the people of Iran. History doesn't always move in a straight line towards progress. Often it's two steps forward, three steps back. So I'm holding all of these feelings at once. Grief, concern, curiosity, a little bit of hope. And as someone who talks about money and the economy every day, I also know that geopolitical events like this don't stay contained to war headlines. They ripple through financial headlines, through policy decisions, and they affect all of us. Which brings us to some of the headlines that caught my attention this week. Firstly, the war and the markets. Of course, the markets are doing their usual business right now. When there is so much geopolitical tension and uncertainty. The markets will reflect that. We saw that this week Tons of volatility. Up, down, left, right. Investors are also paying particular close attention to oil. Iran is the fourth biggest oil producer in opec. So when conflict disrupts production or creates uncertainty around supply, it doesn't take long for the market markets to react. And earlier this week, we saw really sharp gains in oil prices, largely driven by fear that Iranian production could be reduced significantly. And then the other ripple effect is that when oil prices spike, it's not just gas prices at the pump that see the impact. It's also the entire economy. Transportation costs, manufacturing costs, food prices, because energy touches pretty much every, every bit of the supply chain. And then some analysts are also wondering whether rising oil prices could complicate the Fed's plans for interest rates. The Fed has been trying to very carefully manage inflation while also keeping the economy stable. Today I'm recording this, but I don't know where the jobs report landed on Friday as we're hearing this. I'll know that later, but that's a big marker of where we are in the economy. And if energy costs surge, that can, that can push inflation higher again. And then suddenly, the Fed might have to rethink whether it can cut rates as quickly as the markets were hoping, as Trump was hoping. So this is one of those moments where geopolitics and personal finance collide. How something thousands of miles away can very quickly affect everything from our portfolios to our mortgage rates to what we're paying at the grocery store. More people are also tapping their retirement savings right now. This is a headline that came from the Wall Street Journal, and it speaks to the financial stress that many families and households are feeling right now. Many more Americans are digging into their retirement savings early because of financial emergencies. This comes from Vanguard, where they found a record 6% of workers in 401k plans took what's called hardship withdrawals in 2025. The average was about 2%. So we've basically seen that number triple. The most common reasons people cited for taking the withdrawals were avoiding foreclosure or eviction and paying medical bills. The median withdrawal was about $1,900, which tells you something important. Many of these withdrawals are not about big purchases. It's about survival. They're about plugging financial holes. And while unemployment overall remains relatively low and consumer spending has been moderate to strong, we're also seeing signs of financial strain in other places. Rising credit card balances, more people falling behind on debt payments. Increasing demand for credit counseling services. One important reminder here, though. If you withdraw money from a retirement account before 59 and a half. It is taxed usually as ordinary income and often comes with a 10% penalty. So these decisions have long term consequences for our retirement security. But again, when you're facing eviction or your medical bills, as I say, I love this expression. I didn't originate this. When your house is on fire, you don't question the cost of the water. You're not thinking about tax penalties 20 years from now. Right? You're thinking about surviving the moment that you're in. And I can't blame people for needing to do this if it means paying for something very consequential like a medical bill or a car payment. Today, on an unrelated note, but a financial headline that really stopped me and not for good reason. Mr. Beast is entering financial services, everybody. This made me do a real double take this week. According to the New York Times, Mr. Beast, the world's biggest YouTube star, is getting into banking. His name is Jimmy Donaldson, who most know as Mr. Beast, is 27 years old. By the way, did you know that he doesn't age? And his company, Beast Industries, recently acquired a financial app called Step. Step is a banking style app that's designed for teenagers and young adults. And it already claims to have more than 7 million users. The app allows you to open spending accounts, savings accounts, and investment accounts. Parents can supervise the accounts for users under, under 18. It also issues a secured card that functions like a debit card. But it can help young people start building their credit history, which in theory, it could be a useful tool. I know some credit unions offer these sorts of secured cards. Essentially, you put your own money onto it as collateral. It becomes your credit line. And then as you spend and pay your balance off in full, you sort of like develop a quote unquote credit profile and then you can graduate to a credit card. And on the surface, I think I like the idea of helping young people understand money earlier in life. Obviously, financial education for teens is something we desperately need more of, especially in this country. But where it starts to get concerning for me is, and this is, according to the New York Times, the investment side of this platform of Step. It could eventually include cryptocurrency exposure. And Beast Industries recently received a $200 million investment from a company called Bitmine Immersion Technologies, which is a digital asset platform. Its CEO has openly said that his goal is for the company to own 5% of the total supply of Ether, one of the major cryptocurrencies. So connecting all those dots, you got an influencer, a young, influential Audience crypto investing. I have to say, I'm not super comfortable with where this could go. Teens, look, we already live in a world where social media is blurring the line between entertainment, marketing and advice. And when financial products enter that world, things get risky very quickly. So I'm not totally into this idea. Financial literacy is important, but finance and influencer culture, especially at the beast level. Mr. Beast level. Tricky mix. And before we get to your questions, I'll end with a little pop culture moment that's been occupying my brain lately. I've been watching Love Story on FX on Hulu, which dramatizes the relationship between John F. Kennedy Jr. And Carolyn Bessette Kennedy. And of course, now that I've said those names out loud, my phone is probably listening and my Instagram feed will soon be completely flooded more than already with reels about them. But I wanted to say that watching this series brought back a memory for me. So I was 19 when JFK Jr. And Carolyn Bessette Kennedy died in that tragic plane crash. It was 1999, and honestly, at the time, I didn't know a lot about Carolyn Bessette Kennedy other than what the tabloids said, and not even of JFK Jr. For that matter. I knew more about him just because of his family, right? But Bessette Kennedy, she was portrayed at least back in the 90s, mostly as like this glamorous, kind of mysterious style icon. She didn't love the spotlight. But watching this series and hearing more of the stories from people who actually knew her, now I feel like I have developed sort of a girl crush on Carolyn Bissette. You know, she comes across as incredibly independent, strong willed, thoughtful about her identity. The show portrays her as someone who was deeply passionate about her career and somewhat hesitant to enter a relationship where she feared her identity might get swallowed up by someone else's fame. And I loved that about. I love that she was so self aware and loved herself so much to go, you know, do I really want this for myself? You know, she was an ambitious woman and so she was obviously grappling with that question, how do you build a life with someone without losing yourself in the process? Now, I should say there are a lot of critics of the series. JFK's grandson, Jack Schlossberg, has said publicly that he doesn't like it. And of course there are dramatized scenes and fictional elements. But the actress who plays Carolyn Bessette, her name is Sarah Pidgeon. This is the first time I'm seeing her work. She does a magnificent job I think of portraying the many layers of Carolyn Bissette Kennedy, really a complex, multidimensional person. And it just reminds you how often the public only sees, you know, the tabloid version of people, especially women. We see the clothes, we see the makeup, the headlines, the gossip, and not really the substance underneath. So I'm happy to be watching this, hearing stories from people who knew Carolyn. Many describe her as someone who quietly supported her friends. She championed women around her and was very firm in who she was. And I can't help but think that had her life not been cut so tragically short, we might have eventually seen that side of her more clearly. She could have been a real, you know, positive influence, more than she already was in the world. All right, with that, let's turn to your questions. First up is Lori, who wants to know, if a person inherits a 401k and their advisor says they must take a distribution, can they transfer or gift this money to a family member so that they personally don't need to take the distribution? So here's what I know. I know that if you inherit a 401k, what happens next depends on your relationship to the person who bequeathed you this 401k. If you're the spouse and you inherit the 401k, you generally have more flexibility with what to do next. You have some choices. One is either you can roll the 401k into your own existing IRA and there it's going to be treated as just more money in your retirement account. And that way you're avoiding the required minimum distribution until the standard age of 73. The other option you have is you can open up what's called an inherited IRA and take distributions based on life expectancy for those who are not the spouse and they inher. A 401k could be a child, it could be a sister, anyone. A non spouse heir does not have the option to roll an inherited 401k into their own IRA. What you have are two other options. You can either transfer the 401k into an inherited IRA or a beneficiary IRA and then distribute the funds over a 10 year period. This is often the most common choice because it does have this flexibility built in over the years where you can take the distributions out during those 10 years. The other option is you take a lump sum distribution and this would spark a tax event. You would get immediately taxed and then it could push you into a higher tax bracket. So this is not the most favorable choice. Although it is nice to get a lump Sum but it could mean a bigger tax bill. These are all IRS rules and they're very strict. So if you're a financial planner or tax advisor is recommending a choice, I would lean into that. They're probably coming to you from the perspective of this is the best, you know, tax wise, this is the best move. Or investment growth wise, this is the best move. So I would, I would defer to your CFP or your cpa. Okay, next question. A listener in the audience is trying to build up their emergency fund. So would it make sense to pause their $500 monthly contribution to their IRA and move that $5, their emergency fund. They add that the IRA is separate from their retirement fund, which they automatically contribute 10% to every paycheck. All right, so I like knowing that there is an existing retirement account to which you are transferring 10% every paycheck. That's very good, that's very good, that's strong, and that's not going to be compromised in this effort to build your emergency account. If you've been supplementing your retirement with this IRA and it's been $5 month and your emergency fund is lacking, meaning it's not quite near four to six months or really six months of your expenses set aside, then I would focus on building that emergency fund, taking that 500 monthly contribution and moving it over. But if there are any upside changes to your financial life, meaning you get a raise, you get some sort of lump sum windfall, a tax refund, I would use that strategically, maybe split it between the IRA and this emergency account. Is 10% of your paycheck into this retirement account, possibly a 401k quote, unquote, enough? I'd like to know more there. I'd like you to do some math. I'd like you to look at sort of what you have currently invested, the balance there, and at this current investment rate of 10% of your paycheck, accounting for increases in salary, where's that going to leave you by, say, age 65 or age 67? Also consider your Social Security income. If you were to start drawing down on Social Security, get a sense of how retirement, quote, unquote, ready you may be with just this 10% investment rate. Why this is important so that you can go back to this strategy of saving for a rainy day and taking this money out of your IRA to do that with either a sense of urgency or like, I've got time, you know, because I'm doing really well already on the retirement retirement front. I have a 10% allocation I am contributing 10%. I've run the numbers. It's going to work out for me. And so this $500 is nice and extra to the IRA, but I'm going to take the next X months or year to move that over into my emergency account and build my reserves there because that's very important too. Shifting gears to the irs, a listener in the audience has a concerning question about a potential compromising of her taxes by fraudster. So she writes that our accountant just had our taxes kicked back, saying one of our dependents had already filed a tax return. Hmm. But my oldest had apparently filed her own taxes, so we took her off and still got a kickback. Our accountant thinks someone may have filed a return fraudulently in their name. We are being told to fill out identity theft affidavits and for all of us to get IP pins through the irs. I hadn't frozen credit for myself or my kids. Just recently learned about it. Should I do this now? I'm headed to annualcreditreport.com to pull everyone's credit reports and see what I can learn there. Any other advice? All right, this is concerning and it's not clear where the if and where there has been some fraud. I had a friend one time who had someone file a tax return in her name using her Social Security. It was a false claim. They ended up getting getting a credit. She goes to file her taxes and the IRS is like, you've already filed your taxes. So it was resolved. But it took many, many months. And you know, the IRS is not super accessible. Everything is done through the mail. They have a hotline, but it's very hard to get a real person on the phone. So patience is really important. Having in this case, like our listener does, a tax preparer involved, very important. They may be able to be an additional linkage to you to the irs. Sounds like our friend is taking the right steps, pulling your credit report. By the way, everyone can do this@annualcreditreport.com I think it's something good for everybody to do once a year or especially ahead of applying for a loan. Just to see. It won't tell you your credit score, but it will tell you the history of your credit activity. It will show a list of all of your accounts in your name, from your credit cards to any outstanding loans, student loan, car loan, mortgage, et cetera. You want to check to make sure that it's correct. Sometimes there are are mistakes that are benign, but they need to be corrected. Like maybe there's an old address. Maybe it's got a misspelling of your name. Definitely check to make sure your Social Security number is correct and all the credit files are ones that you recognize. If you see any credit files where you're like, I didn't open that Banana Republic credit card or that Amex, that's a red flag. And this is the sort of stuff you want to be looking for. These inconsistencies, these unfamiliar accounts. Especially for our friend here who's worried about a potential fraudulent incident, there are a few other steps that I would recommend given the situation. You want to work closely with the IRS here. Follow their steps. Fill out the identity theft affidavit for each person that may have potentially been involved. Your adult child. You then this alerts the IRS to your situation and helps them monitor for further fraudulent activity. They may have already sent you the this form. 14039 IRS IP pins. You mentioned these identity protection pins. These are unique six digit numbers that help prevent someone else from filing a tax return using your Social Security numbers. The IRS has advised our friend of this. It's a good move. I think everybody ahead of tax season get an IRS IP pin if you don't already. It's a great way to add an extra layer of security to your tax record. The credit freezes. I'll be honest with you, they can be kind of annoying. Freezing your credit, your child's credit with all three major bureaus, Experian, Equifax, TransUnion. It can be a smart move, but it does prevent anyone from opening new credit in your name, including you. It doesn't mean that you can't, but it creates a barrier. A credit freeze. It doesn't affect your existing accounts. You can still go ahead and use your credit cards, pay your mortgage. It just prevents any new credit from being opened. So current loans, credit cards, lines of credit remain active. If though you want to apply for new credit, you can sort of like thaw the freeze temporarily. Temporarily lift it. You can do this online, you can do it by phone, but you can only lift it for a specific creditor or for a specific period of time. And you want to do this with all the credit bureaus because if you just do it with one credit bureau credit reporting agency, it won't prevent a lender from accessing your credit through another bureau. And a credit freeze will remain intact until you lift them. A fraud alert, meantime, is a lighter approach, but still effective. You could do this either with the credit freeze or in lieu of a credit freeze. It's not as intense. But what it does is that lenders will need to verify your identity before allowing any new accounts to be opened in your name. This is great, obviously, if somebody who is pretending to be you is trying to open up a credit card or what have you in your name. But they'll also do this. When you are applying for new credit. First look at your credit report and see what's going on. If you do see some crazy activity, then freezing your credit may be the next right move. Otherwise you might be overdoing it and you've just created some more hassle for yourself. The other thing you can do is a monitoring service that monitors your credit. If you feel like you want to have another set of eyes, professional eyes on your credit, there are identity monitoring services that will alert you to new account activity. If anyone uses your Social Security, any attempts at fraud. Some are free through insurance providers or banks, so you might want to check with your home insurance company or your financial institution, wherever you bank. And then some are IRS supported options. Finally, I've used this before as well, the IRS Taxpayer Advocate Service. There you will get in touch with a human, but it can be a long wait and sometimes they're not super helpful. But at least you get to talk to somebody who can maybe answer your question or at least put something to rest. I remember using, I remember calling the Taxpayer Advocate Service when I was waiting for a refund during COVID It was taking so long and I just wanted to know where it was, where it was in the process. I wasn't able to log in to the website and I was told that because I wasn't below a certain tax bracket that there wasn't really anything they could do for me. They're like, are you unable to feed your family? I said, no, but I really like my tax refund. She said, yeah, I just have to wait. Sorry, I have no more information for you. But at least it kind of put a nail in it. I was like, all right, I'm just. It is what it is. That's an 800 number. So in summary, follow the IRS's recommendations. Consider a credit freeze. Definitely check your credit reports@annualcreditreport.com and if you do want an extra set of eyes on your credit and your identity, you can consider a monitoring service, which some cases might be free through your bank or your insurance company. Company. All right. Is there such a thing as investing too much money? This question comes from Jennifer in the audience. I think it's easier to maybe answer the question, are you investing Enough. Because we know that we need a certain amount of money for retirement, there are calculators that can help us to figure that out. That amount is usually based on what your expenses will be in retirement. And the rule of thumb is that you have about 25 times your annual expenses saved by the time that you retire. So if you are spending $100,000 a year, then that's $2.5 million. It's also based on the assumption that you're going to withdraw about 4% of your savings each year, because then that would last you for about 30 years or more during your retirement. So let's say, though your annual spend is 50,000, multiply that by 25 for retirement. That means that you want to have about a million and a quarter saved. There are studies that say the average American is going to need anywhere from 1 to 2 million dollars. All of this, of course, depends on where you live, your lifestyle, your tax bracket. But for our friend here who's wondering if she's investing too much, this is pretty subjective. I want to say that she comes to me with this question because she's feeling cash strapped at the end of each month. That's what's really prompting the question. She and her husband together are investing about 20% of their salaries towards their future savings towards retirement. They feel like they're penny pinching a little bit during the month to get this done. And they have a baby, so they're new parents. And of course, yeah, there are unexpected costs that come with that. And it just feels like their investing rate is not leaving them with enough cash, cash during the month to make ends meet comfortably. So my advice is just first run those numbers with this 20% investment rate. And by the way, they're still in their 20s. And then where does this leave you in 40 years? You can use a simple compound interest calculator. Put in what you've currently invested. Let's say you've got a total of 100,000 so far. Then use an average return of, I would say 7 or 8%, 40 year term. What does that leave you? Contributing what you're currently contributing every month. What does that leave you? I don't know what your salaries are, I don't know what this monthly contribution is. But let's say keep it simple, the math simple, that you're contributing $1,000 a month towards retirement, $12,000 a year times 40 years. With a, let's be conservative, 7% interest rate rate, you're looking at $3.9 million in 40 years. How do you feel about that? Let that sink in. Now, if you were to reduce your monthly contribution by $500 a month, that would leave you with 2.7 million in retirement. This is all just calculations. It's not firm, like, don't, you know, don't sue me if this isn't what happens. This is just using calculators and estimations. So 3.9 million at your current investment rate. Let's say if you were investing $1,000 a month, 2.7 million. If you dropped it to $500 a month, which by the way, either of those scenarios is still very much more than what the average person is retiring with. I think it's important to get close to the numbers and then project where you're going to land at this current rate. What is the goal? Do you want to retire early? Do you want to retire, quote unquote, on time? Do you never want to retire? All that you need to figure out because it's going to inform what your investing rate should be. But I can tell you that as new parents, yeah, there are a lot of unexpected costs. There are also a lot of expected costs that take up so much of your budget. And if you do need to bring down this investment rate for a while, temporarily, let's say for the next year or two, so that you can have more cash in your life to have more breathing room month to month, I think that's fine as long as you're contributing enough to earn, let's say the match from your employer, you're at least contributing 10%. 10% is the original general investment rule of thumb that experts recommend. Assuming you begin investing in your 20s. This couple is doing a combined 20%. And I would also say you can make this decision now. You can always change your decision later on when you feel like you have enough breathing room or you make more money or you have just more money to work with. But I do empathize with families in the beginning of having kids who need that cash flow. Balancing that with their future investments is very difficult. You have to be practical and reasonable. You gotta be flexible with how much you invest every month for your future. If that's not gonna leave you with enough today to live comfortably you're currently investment rate, well, something's got to give. And the good news is some of those costs that you're dealing with now, child care, those will shrink over the years. Eventually they'll go to zero. Trust me, they will be able to take care of themselves one day, for the most part, inevitably, as your kids go to school and you won't need as much care around the clock. That money that you're spending now on childcare, you can pocket and potentially put back in your. Your investments. And that's our show, everybody. Thanks for tuning in. I'll see you back here on Monday. And I hope your weekend is so money.