05.19.25 The True Costs Of 401(k) Loans / Checked Bags - Lost & Found

Summary

The Clark Howard Podcast – May 19, 2025 Episode: The True Costs Of 401(k) Loans / Checked Bags - Lost & Found

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Introduction

In this insightful episode of The Clark Howard Podcast, host Clark Howard delves into the intricate world of personal finance, addressing the true costs associated with borrowing from 401(k) plans and offering practical advice on travel-related financial decisions. With engaging discussions, expert advice, and real-life caller scenarios, Clark empowers listeners to make informed financial choices.

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The True Costs of 401(k) Loans

Clark opens the episode by tackling a potentially uncomfortable yet crucial topic: borrowing against your 401(k). He emphasizes the importance of understanding the long-term implications of such decisions.

“When you take out a 401k loan, you are having what's known as opportunity cost where you no longer have that money in there. And two years out of three you're going to have a nice gain on your account from what the market generally does going up.”
[03:45]

Clark underscores that withdrawing funds disrupts the compound growth essential for retirement savings. Additionally, he highlights the behavioral pitfalls, such as reducing automatic contributions while repaying the loan, leading to a double financial setback.

“Using it as your mad money fund sabotages your future for your present.”
[05:10]

He strongly advises against using 401(k) loans for non-essential purchases like cars, boats, or vacations, framing it as a detrimental habit that can jeopardize long-term financial stability.

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Caller Questions and Advice

The episode features several callers seeking personalized financial advice, each shedding light on diverse financial challenges.

1. Jenny from Kansas – Custodial Roth IRA for a 9-Year-Old

   Jenny inquires about starting a custodial Roth IRA for her 9-year-old, who is keen on investing.

   “As long as you document that your child is actually doing the work, you pay them a paycheck, take the money, they put it in the custodial Roth, I think you're just fine.”
   [06:36]

   Clark commends Jenny’s proactive approach and reassures her about the legality and benefits of involving her child in a family business to fund a Roth IRA, drawing from his personal experience with his children.

2. Tyler from Florida – Health Insurance for an Adult Child

   Tyler seeks solutions for maintaining health insurance for his soon-to-be 21-year-old daughter after she loses Tricare coverage.

   “The alternative, and I want you to compare it for your daughter is to buy a policy for her on the Obamacare exchange because at least for now she will qualify potentially for a free or really cheap policy...”
   [08:15]

   Clark suggests exploring the Affordable Care Act (Obamacare) exchanges as a cost-effective alternative, emphasizing the importance of maintaining coverage for ongoing mental health treatments.

3. John from South Dakota – Business Bankruptcy and Tax Issues

   John’s family member faces bankruptcy due to embezzlement, leaving their financial and tax records in disarray.

   “It's going to be in his case hiring an enrolled agent. An enrolled agent is somebody who is registered and licensed to represent with the IRS.”
   [11:07]

   Clark advises hiring an enrolled agent to navigate the complex tax situation, highlighting the necessity of professional assistance in resolving such financial crises.

4. Sherry from Florida – Gigsky and Cruise Wi-Fi

   Sherry questions the legitimacy of Gigsky’s affordable Wi-Fi offerings for cruises.

   “Going to buy one that specifically works on cruises... But you do not get unlimited data. This is just for staying in touch, for reading your email and texting...”
   [20:23]

   Clark explains the functionality and limitations of Gigsky’s eSIMs, advising on their appropriate use for limited data needs during cruises.

5. Dave from Connecticut – FDIC Insurance Limits

   Dave seeks clarification on FDIC insurance coverage across multiple accounts within the same bank.

   “You can stretch the insurance per institution and how you title an account...”
   [23:05]

   Clark clarifies that FDIC insurance limits apply per ownership category, not per account, and recommends spreading funds across different account types or institutions to maximize coverage.

6. Robin from Ohio – Private Equity and Restaurant Chain Acquisition

   Robin shares a story about a beloved local restaurant chain in Ohio being taken over by a private equity group, leading to job losses. However, an independent group from Michigan steps in to revive the restaurants under a new name, reinstating former employees.

   “What good has private equity done somewhere in the United States? Could somebody with a PE firm tell me where it's not been horrible for the public and horrible for the workers...”
   [25:15]

   Although Clark appreciates the entrepreneurial spirit behind Robin’s story, he expresses skepticism about private equity’s role, questioning the benefits and urging private equity advocates to share positive examples.

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Checked Bags and Lost & Found

Shifting gears, Clark offers travel-savvy advice on managing checked baggage to avoid the hassles and costs associated with lost luggage.

“You can avoid all those horrific baggage fees... but let's say you have status and you avoid the baggage fee or you got one of those cards that covers one bag for you...”
[16:23]

Clark recommends using AirTags or their competitors to track checked bags, highlighting technological advancements that airlines are now embracing to improve baggage handling. He shares a compelling story about a woman who used an AirTag to locate her lost bag, emphasizing the practicality and peace of mind these devices offer travelers.

“It's a lot easier for me, but when I travel to a cold weather climate... I am able to pack for 10 days without breaking a sweat in a carry-on bag.”
[17:10]

He encourages listeners to utilize tracking devices and provides resources on his website, ClarkDeals.com, for finding deals on travel accessories.

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Conclusion

Clark Howard wraps up the episode by reinforcing his mission to empower listeners with actionable financial advice. He invites listeners to engage with ClarkDeals.com for exclusive offers and to stay tuned for future episodes packed with tips to save more, spend less, and avoid financial pitfalls.

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Key Takeaways:

• 401(k) Loans: Significant opportunity costs and behavioral setbacks make borrowing from 401(k) plans a risky move that can hinder long-term financial goals.

• Custodial Accounts for Children: Encouraging children’s financial literacy and investment through custodial Roth IRAs can set them up for future financial success.

• Health Insurance Alternatives: Utilize Obamacare exchanges to find affordable health insurance options, especially when traditional plans like Tricare are no longer available.

• Professional Tax Assistance: In complex financial crises, such as business bankruptcy due to embezzlement, hiring an enrolled agent is crucial for tax resolution.

• Maximizing FDIC Insurance: Spread deposits across different ownership categories or institutions to fully utilize FDIC insurance limits.

• Travel Smart: Use tracking devices like AirTags to manage checked baggage efficiently and avoid the stress and costs of lost luggage.

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For more advice and exclusive deals, visit www.clark.com and www.clarkdeals.com.

Transcript

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[Clark Howard]

I'm so glad you've joined us here on the Clark Howard Show. You know our mission is to serve you with advice and information that empowers you so you make better financial decisions in your life. I want to address something head on and I'm going to make you potentially uncomfortable. When's it okay to borrow against your 401k? Also coming up later I want to talk about what you should be doing to protect yourself. If you like to check bags on an airplane, I don't know why you would, but if you do, we're going to talk about that. So 401ks are something that half of us in the United States are privileged to work somewhere to have access to one. Because a 401k does something that makes a big difference in your life. Because left to our own devices to go out and set up our own Roth ira, most of us might actually get the account set up, but then we forget to fund it. An important thing, right? It's behavioral finance. You know that something being done automatically is something much more likely. We stick to something that manually requires we take an action. It's a harder thing for us to do. So that's why the 401k has been kind of like a magic pill to get people saving for the future who might not have otherwise because the money just comes out of your check before you get it. We auto enroll our employees at my company and we do I think it's automatically enrolled them at 6% and I match it with 6%. So if they do nothing, they're saving 12% of their pay in our default is we put them in a Target retirement fund because I want people to as force of habit to be saving money for the future. How do you mess that up? You take out loans against your 401k. And I know, I know everybody says, oh well, I'm paying myself back, I'm paying interest. But the thing is, over the years, when you take out a 401k loan, you are having what's known as opportunity cost where you no longer have that money in there. And two years out of three you're going to have a nice gain on your account from what the market generally does going up. The money you pulled out is a participation penalty. That money's not there to grow. Plus to add to the fund because you're having to pay that loan back you took from the 401k. Being what consumer behavior is, people reduce their automatic contribution to the 401k while they're paying back a loan. So it's a double whammy. You're losing the earnings on the money that was there because it's not there now. And you're not contributing what you were contributing before because you got to pay back that loan. And if you lose your job or decide to quit, that money's due right away. If you don't have it, you've created a premature withdrawal from the 401k. You owe tax on the money plus a 10% penalty. Can you get it? I don't like 401k loans. Why are they even allowed? Because it's the same reason Congress in its wisdom did something I love where with 529 plans for college savings, they created this escape valve where you could move money out of the 529 tax free into a Roth IRA. Because a lot of people who just weren't sure if their kid was going to go to college, weren't contributing to A529 and then didn't have money to pay for college. So they came up with this escape valve where you can move that money into a Roth so that even if you don't know if your kid's going to go to college, 529 from the get go is a great way to put build up tax free money for them. So with the 401k, the reason the loan provisions in there is because there was so much fear that people wouldn't contribute to one. If they were worried when they needed money, they couldn't get to it. Problem is it becomes habit forming and there can be an absolute financial emergency in your life that you'll have to define. I won't that means you feel like you gotta pull that loan from the 401k and there are God times. But doing it as a habit, using it as your mad money fund, that sabotages your future for your present. And do not borrow from a 401k to buy a car, buy a boat, buy a jet ski, buy anything that's recreational, voluntary, whatever. Never for lifestyle, never for that vacation you want to take. Don't do it. Okay, enough guilt trip.

[Caller]

Jenny in Kansas says we've been talking to our kids about the importance of saving and investing. My 9 year old is very interested in investing. We would like to help him start a custodial Roth ira. We own our own business and could pay him a few hours a month to shred papers. The problem is age 14 is the minimum working age for the state of Kansas. I would love to hear your thoughts and advice on how to get him started.

[Clark Howard]

All right. So Jenny, I love the work ethic. I love your 9 year old working in a family business. So the child labor laws are really about people working for a stranger or working in a dangerous job, whatever. I would be very, very shocked if the state of Kansas or any other state would come down hard on you for having your kid do some low risk kind of things in a family owned business. And as long as you document that your child is actually doing the work, you pay them a paycheck, take the money, they put it in the custodial Roth, I think you're just fine.

[Caller]

So your kids were in commercials like a couple of your kids, right, when they were younger?

[Clark Howard]

Yeah, which the law specifically calls for. And so both of my younger children, my older daughter never did this, but both of my younger children were in commercials or print jobs from when they were very young because with Lane being an actress, they like to hire the kids of an actor who understands the deal and all that. So they both, they have very decent Roths now as adults from the jobs they did as kids. But that is an exception to child labor laws. There are specific rules about how you got to treat a kid on a work site for a commercial or print job. Not always followed, but there are rules there.

[Caller]

Tyler in Florida says. Hoping you can direct me to finding health insurance for my adult child living at home. I'm a single father and active duty Air Force officer stationed in Orlando, Florida.

[Clark Howard]

Thank you for your service to our great Nation.

[Caller]

I have two children living at home with me, a 15 year old son and a 20 year old adult daughter. Currently my daughter is experiencing a failure to launch and is not in college and is searching for a job. My daughter will turn 21 in a few months and no longer be considered my dependent and lose tricare health insurance health care coverage. I have explored the tricare young adult option, but coverage is expensive and unfortunately not an option I consider my daughter's currently using her health care benefits for counseling and mental health. Losing health care would certainly delay any progress she's been making towards launching Please help Tyler.

[Clark Howard]

You know something I've never understood? When the feds adopted the Obamacare system, insurers were required to allow you to maintain dependent coverage on a child till their 26th birthday and even if they're out living on their own and all that till age 26. But the government didn't require that a Tricare. I don't get it. I mean you're a military family earning less money than you could in the civilian world. To not provide you that option blows my mind. But the alternative, and I want you to compare it for your daughter is to buy a policy for her on the Obamacare exchange because at least for now she will qualify potentially for a free or really cheap policy because she has not launched. That's as long as Congress keeps the subsidies in place based on income and you can compare what it would cost you. Just go to healthcare.gov what it would cost to buy a policy for her there versus the tricare young adult option which may as crazy expensive it is may be the best alternative weirdly because otherwise if you go buy what's known as a non compliant plan, it's not going to cover the counseling and mental health care that she's getting right now.

[Caller]

John in South Dakota says my family member's manufacturing business went bankrupt and lost everything due to his business manager embezzling funds and maxing out lines of credit, wiping records and running. He filed all the needed paperwork and authorities for identity theft and crimes with authorities. Needless to say, his bank accounts, credit and everything is a mess. And his business and personal taxes haven't been filed for years now because the records are all gone. He now has a new job and he's getting things slowly back in order but still is at a loss of where to start with taxes and organizing his finances. Is there any organization or government department that can help him know where to start?

[Clark Howard]

So John, it's not an organization or government department. It's going to be in his case hiring an enrolled agent. An enrolled agent is somebody who is registered and licensed to represent with the irs. They're an expert in taxes in his situation. If it were a situation where he had a lot of obligations to the IRS and also had a really nice stream of income. Normally the IRS has a real target on you for the back pay and all of that, but not being in that situation, then you'd hire a tax attorney in a situation like that. In this case, an enrolled agent I think is the right route. You can look up for your family member. How to find an enrolled agent online and find somebody near them. If they live in South Dakota like you do, find one near you. And they might be at the two ends of the state in Rapid City or Sioux Falls, but maybe you'll find one wherever he is in the state. And that would be where to start. This is such a terrible thing. And gosh, it's not reported that heavily. It's very common in a small but thriving business where there aren't enough because of the size of the business, aren't enough internal controls that one crooked employee can harm a business or even destroy it by being in a position to steal with no prying eyes watching. One thing I'll tell you, if you have a business that's growing quite rapidly, you always want to have your check set up or payment system set up where it requires two authorizing signatures on it, a check or a double authorization for electronic payments. To have prying eyes of an owner on an operating person as the money is leaving the business, that it's never being mishandled, misappropriated or flat out stolen. I'm really, really sorry that that happened. Not just to your relative, but the employees, the hard working employees who lost their jobs as well. Coming up ahead, lighter topic, checking bags. This summer, there's something you need to do to protect yourself. When you fly, you insure your car.

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[Clark Howard]

Bags I don't do that thing. You look at anybody who travels continually and they've got it down to a science. A lot of people use those compression things. They're like little bags that magically shrink their clothes. There's all kinds of YouTube videos of ways that you can cram massive amounts of clothing into carry on for a longer trip. There are people who on YouTube show what clothes they take and how they use layers and all that. So just so you know, as a guy, it's a lot easier for me, but when I travel to a cold weather climate, which lane and I just did recently because it was pretty chilly when most of our trip in Italy. So what do I take? I take simple T shirts and then I take sweater pullover and a sweatshirt. And so I just change out the T shirt every day. Take enough for the trip, enough underwear, enough socks, whatever. I am able to pack for 10 days without breaking a sweat in a carry on bag. You think I'm crazy, don't you? My wife can do it too and she is the most fashionable person I've ever seen. I don't have an ounce of fashion in me, but Lane is able to do that and she's not alone. So many people. Can you avoid all those horrific baggage fees? But let's say you have status and you avoid the baggage fee or you got one of those cards that covers one bag for you checking. And you do want to check a bag because you just hate yourself. No, you want to check a bag. Standing in line to check the bag, watching that carousel go round and round and round with the bags not showing up, but you have. And then the bags eventually show up, but maybe yours doesn't. Yours never comes on it. I mentioned this before. I'm mentioning it again because I got improvements for you airlines that used to be hostile to you putting air tags in your bag. They now like it and a lot of them are integrating it into their lost baggage system. That's right. And Apple seeing this as a real opportunity, the price of the air tags keeps going down. There's sale after sale after sale where you got like four of them for 60 bucks, 65 bucks and you just pop that thing in and you're going to be able to know where the bag is when the airline has no idea where they sent it where they shouldn't have. So this works as a way to do it. Remember the story we told last time about the airtags that the woman could never get the airline to get her bag and she knew where it was and she flew to where it was and found her own bag at baggage claim. So crazy home. I mean who should have to do that?

[Caller]

And there are competitors to air tags.

[Clark Howard]

I don't know if eventually for androids.

[Caller]

Right. And we often have deals on those on clarkdeals.com every time there are deals.

[Clark Howard]

On those because our Clark deals audience loves travel and so we're always posting the deals on airtags and their competitors.

[Caller]

Also speaking of travel, they do have a second travel newsletter that they're publishing now at Clark Deals, which I think is a lot. We, we, we the team. I called the team, because I'm not writing it, the team is doing it and I think they do a great job. Okay. Sherry in Florida says, I watched a YouTube video promoting gig Sky. Supposedly it's a cheap WI fi for cruises and pretty much anywhere else. It seems like a good deal. Is it legit or would I be wasting my money?

[Clark Howard]

Okay, so let's talk about just using. And these are eims electronic sim. Almost all phones now take EIMS instead of a physical one. You can before you go on a trip anywhere in the world, pretty much you can buy an ESIM that will save you a fortune versus using the calling plan you have from T Mobile, AT&T or Verizon. So the cruise angle is a newer angle where you can buy one that specifically works on cruises. And Gigsky is the one that is most prominent in this space. So Gigsky sells most cruise ships that Americans go on our Caribbean cruises or in the Americas. So these things for a week long cruise tend to cost about 50 bucks for the week. But you do not get unlimited data. This is just for staying in touch, for reading your email and texting because you only got three gigs of data. You know what three gigs of data is? Not a lot. You're not watching videos, you, you're not having FaceTime calls or WhatsApp video calls. But you're able to stay in touch on the ship. Generally you have to get pretty far off from shore and then you go through the process of switching over your SIM to in your second slot. It'll be in there to the Gigsky and you do it that way. Why do people do this? Because maybe they're working on a big business deal and they need to keep access or whatever. The Internet from the cruise ships is very expensive, but it will be normally unlimited. The cruise ship WI FI now is very, very good on most ships now because they're using the Elon Musk thing, the Starlink, and it works so well. I was on a cruise that had Starlink and it was flawless the whole cruise. Expensive but flawless. So this is for a limited purpose, limited use and other cruises, other parts of the world. It's going to cost you a little more for the data with Gigsky.

[Caller]

Dave in Connecticut says, please correct me if I'm wrong. I think banks are insured up to 250,000 per person per account or up to $500,000 on a joint account. But what happens if you have more than one account with the same bank such as a savings account, CD account, money market, et CETERA would each account be separately insured?

[Clark Howard]

No.

[Caller]

Also, do credit unions operate the same way being insured by ncua?

[Clark Howard]

Yes. So you can stretch the insurance per institution and how you title an account. Could be a trust, could be a retirement account, could be a personal account, could be a joint account. There are ways. And if you go to fdic.gov and go to their Frequently Asked Questions section, there's a briefing that shows you how you can multiply the quarter million coverage at an individual and be the same for ncua. How you can stretch that out, never ever rely upon the word of somebody in a bank branch or credit union is we learned during the bank failures, back during the banking scandals and the OOs led to the Great Recession, the position of the FDIC and NCUA was either oral or written representations by a bank officer meant nothing. The only thing that matters are the rules of FDIC and NCUA which you can read. And again you can just go read the FDIC briefing because it applies to both. Easier answer Put your money, if you've got that kind of thing, put your money in a federal money market account money market fund at one of the big low cost outfits, preferably Vanguard. You could do Fidelity, you could do Schwab. And not only you're going to have something better than FDIC insurance, you're going to have a direct obligation of the federal government earning more usually than what you can earn on a CD or savings account at a bank or a credit union.

[Caller]

Robin in Ohio says a few months ago I sent an email about how upset I was that a private equity group had purchased a beloved chain of family restaurants in Ohio, which I will call Franco's Billy Bob Restaurant. I remember this and for some reason which I don't understand, intentionally withheld lease pays payments so the restaurants would be foreclosed on. Employees who had worked for the restaurants for decades lost their jobs right before Christmas. I saw that as a very dark side of capitalism. But here's a happy after most of the Franco's Billy Bobs were closed, the Billy Bob chain of restaurants in Michigan got into the picture. The Billy Bobs of Michigan are independent of Franco's and they decided to buy the closed Franco's Billy Bob restaurants in Ohio and reopen them. But the Franco's Billy Bob said they had exclusive rights to the name of Billy Bob in Ohio and they took the Michigan Billy Bobs to court to stop them from using the name. The court hasn't ruled yet, but in the meantime the Michigan Billy Bob's have started buying the closed restaurants and are reopening them under the name of Billy Bob's girlfriend, who is a comic book character from the 1950s. The food is very similar to what customers are used to getting at Billy Bob's, and many of the former Billy Bob employees have gotten their jobs back. I admire the ingenuity of of the Billy Bobs of Michigan, and this is a great example of things working out for the good under capitalism.

[Clark Howard]

Robin I love this story and obviously people from the Midwest know what chain it is. I'm going to leave that out here. I've been reading about this ongoing fight. I read about it in the Detroit Free Press that what's going on with all this corporate drama and what good has private equity done somewhere in the United States? Could somebody with a PE firm tell me where it's not been horrible for the public and horrible for the workers at a firm that PE comes and infests with its ugly virus? Maybe there is somewhere that it's been a good thing. I don't know where. I'd love to hear from you if you're a PE advocate, private equity advocate, but thank you very much for joining us today. I hope you enjoyed today's podcast and that you go have a nice burger in Ohio at a formerly closed location. Anyway, thank you for being with us and being part of our empowerment zone where it's all about you learning ways to save more, spend less, and avoid getting ripped off. And know what's coming up on Friday. Clark stinks.