What Really Triggers an IRS Audit in 2026?

Well, hello everybody.

Welcome to Financially Confident Christian Live.

Glad you joined me today.

I'm Ralph Estepp Jr. And we come here every Friday at 1pm right here in the same place.

We don't do the version of personal finance where everything gets wrapped up neatly.

On this show we talk about what real people actually live with their money.

We talk about the worry that wakes you up at three in the morning, those decisions you're second guessing and the things that nobody told you until it was too late or almost too late.

And today we've got three questions that I think a lot of people need to hear.

Now before we get to that, I want to make a special announcement.

If you've been listening to this show, you know I've been eagerly anticipating the birth of my first grandchild.

And I'm happy to report that Last night at 8:06pm My grandson, his name is Carson Christopher Estep was brought into this world.

I'm happy to report that him and mom are doing great.

He was actually born with a full head of black hair, so.

Which is kind of funny because neither my daughter in law nor my son have dark hair.

But he's doing great.

They tell me he's doing fantastic health wise.

So for all of you that kept me in your prayers and my family in your prayers and thoughts, I certainly appreciate that.

And today I come to you as a grandpa for the first time.

I don't feel old enough to be a grandpa, but that's where I am.

But let's get into today's show.

I don't want it to all be about me.

So today we've got three questions that I think a lot of folks need to hear.

The first one's a self employed listener who's wondering if she claimed too much last year and whether the IRS is going to come knocking at her door.

Then we're going to talk about a man who spent years planning exactly when to claim Social Security and he just found out that even a perfect plan can fall apart if you wait too late to start the paperwork.

Going to be a very practical discussion about that one.

And then we're going to talk about a woman watching her daughter drain her retirement account just to cover rent and she's asking whether there was a better way and whether she's protected from the same thing happening to her own savings.

As you can tell, they are very different situations, but all of them have one common thing in kava and that is it's more common than people realize.

So if you're watching on YouTube, I'm going to tell you right now.

The chat is open.

You're welcome to shoot me your questions.

If you're joining us here on Clubhouse, come up on the stage or pull up a chair and just enjoy it.

Either way, I am so glad you're here today.

All right, well, let's get into it now.

Before we get started, I want to say, like I mentioned, every Friday, 1pm Eastern, you can go to financiallyconfidentchristian.com FCCLive so if this is your first time here, welcome to us.

Make sure you come back next week and bring somebody with you.

And if you're interested in getting one of the things that we put in our private group is called the Faithful Money Framework.

It's just eight steps, one page, no fluff, and you can grab that by joining our community.

And that's@financiallyconfidentchristian.com join.

So that's a really good idea.

It's where we have a lot of conversations and that sort of thing.

But let's get into our first question and the listener wrote this listener wrote, Dear Ralph, I've been self employed for about four years now and I've always tried to do the right things.

Last year I claimed a home office deduction.

I deducted my vehicle mileage.

I wrote off several business expenses that I honestly believe were legitimate.

But I was talking to a friend recently and she mentioned that self employed people get audited way more than regular employees.

Now I'm nervous.

Did I make myself a target?

Is there a list of things that the IRS look more closely at on your return?

I'm not trying to cheat anyone.

I just want to know if something that raised a red flag without realizing it.

Thank you for everything you do.

Ralph.

Would love to hear your thoughts.

Thank you so much for your question.

I apologize for the pause there.

I use a software called eCamm and I wanted to make sure I changed the scene.

So that's why I took a pause up here.

Wait a second.

Rob's lost his mind.

But that's what I did there.

So I think it's all good.

But let's talk about this.

So the first thing is, and I love your question by the way, you acted in good faith.

That's the first step.

You didn't do anything that you thought was intentionally wrong, but now you're kind of afraid that you did something wrong without even knowing it.

And you're not asking me how to cheat the irs.

If you had asked me how to cheat the irs, I would have said you sorry that's not the question for this show.

What you're really asking is how you look about what you did.

So here's the thing I'm going to tell you.

First thing, you need to understand the fact that this concerns you is a good sign.

People who are trying to get away with something usually aren't the ones lying awake at night wondering what's going to happen if they cross the line.

But let me get into the specifics of this.

The IRS doesn't review your return by hand right away.

It just doesn't happen.

A lot of people think that.

There's these team of auditors at the IRS and as soon as a return comes in, they sit there at their desk and they look over the stuff.

It doesn't work that way.

The way that it works, though, is every return is run through an automated scoring system.

Now, that particular scoring system is called the DIF score.

And what that does is it compares your return against statistical patterns for people in your income and your occupational bracket.

So you might ask, okay, well, that makes sense.

Now, I wondered why on the tax return they always ask me, what is, what do I do for a living?

And that's the reason they do that.

Here's the thing.

Your return gets a diff score.

And if your numbers look significantly different from what's normal for someone in your situation, that raises the score.

And then like anything else, the higher the score, the more likely it's going to go to a human being to look at it.

So we're going to start there.

If your score is high, that's what usually changes the situation, where somebody's going to come and look at your return.

So we got to start there.

Second thing, what actually gets flagged.

Now, unfortunately, as I've read through your question, a lot of the things you talked about are the things the IRS actually flags.

The home office deduction is one of the most closely watched deductions because there has been so many people that have used it inappropriately.

And it's not because it's illegal.

It's a legal thing to do.

But it gets abused constantly.

Here's the reason it gets abused.

The IRS requires that the space be used regularly and exclusively for business.

Think about that for a second.

Regularly and exclusively.

A desk in your bedroom that also has your personal laptop and your kid's homework on it doesn't qualify.

That's something a lot of people don't understand.

Exclusive use.

If you've got a room that's genuinely dedicated, then you're fine.

The key to all this is documentation.

The key to this is pictures, making sure you have those things in order.

So that's the first thing you mentioned.

The same thing goes for the second thing you mentioned, which is vehicle mileage.

And you mentioned you claimed 100% of business use on a personal car.

I'm going to tell you right now, that is a huge red flag, because it's almost never true.

If you're like most people, you drive to the grocery store, you run errands.

The IRS knows this, and that's why a contemporaneous, a big word, but I think it's the right word to use.

Contemporaneous mileage log, meaning you wrote down at the time where you were going, and you got to do that as you go.

And a lot of people say, but, Ralph, wait a minute.

You're telling me I got to write down every time I drive somewhere?

Yes.

If you want to follow the letter of the law as it relates to the irs, you've got to keep a mileage log.

A lot of people say, well, you know, if I get audited, Ralph, I'll do that at the end of the year.

The problem with doing at the end of the year is you're going to forget stuff.

And that's the thing that protects you.

That's the issue.

But in a bigger way, business deductions that look out of proportion to your income also draw attention.

So you mentioned the home office.

I think that's a red flag.

You mentioned the business use or your mileage.

I think that's a red flag.

The other big red flag, and this is the thing a lot of people don't want to understand.

It's all about proportions.

Let me give you an example.

If you made $40,000, let's just say that was your gross income and you claim $35,000 in expenses, that ratio is going to raise questions.

They're going to wonder how you paying your bills.

That doesn't mean it's wrong, because there are times when you have those lean years where the income is down or the expenses up.

But in those cases, that's when you need to have receipts to back that up.

Here's the thing you need to hold onto.

It's all about documentation.

But having documentation isn't just about surviving an audit.

It's about being able to sleep at night because you know exactly what you claimed and why.

And that's the goal here.

I'm going to give you some information.

In 2026, the IRS is using Better technology than most people realize.

Guess what they're using, they're using AI.

AI systems cross reference your return.

They look at your W2s, they look at your 1099s, any third party data.

If it doesn't match, guess what?

The system flags it before a human ever sees it.

And that's where the system does it.

And then once the system says, well, there's these many red flags, Ralph, I'm going to go look at this return.

That's when a human actually takes a look at this.

A small income discrepancy that used to slip through before doesn't anymore because these AI tools are able to find these things.

I know.

If you're like me, use AI all the time to help you with your life.

Well, guess what?

The irs, state governments, local taxing authorities are doing the exact same thing.

So here's what I want you to do right now.

Number one thing you got to do, get your return.

Look at the deductions you claimed, and for each one of those, make sure you have documentation.

Now, the rule says when you file your tax return, you should have the documentation ready at the point of when you file your return, not afterwards, not when you get audited or if you get a letter.

Technically, IRS code says you need to have that documentation ready at the time you file your return.

So go check your documentation, make sure you have your receipts, make sure you have your records, your logs of mileage, if something is questionable.

If you're wondering, you know what, Ralph, I didn't know about this stuff.

Now's the time to consult a tax professional, not when a letter arrives.

So what you've said in your statement here, you didn't say that you're getting audited, you just said, I'm worried about it.

So this is the time to go.

Make sure your I's are dotted and your T's are crossed so that you don't run into a problem later.

And if you think there's a discrepancy, now's a great time to reach out to someone.

You can certainly reach out to me.

Go to financiallyconfidentchristian.com and you'll see a button there to schedule a call with me, even a 15 minute call, so I can give you an idea of what's going on.

But here's what's being financially confident actually looks like in this situation.

It doesn't mean that you get nervous.

I understand the anxiety.

A lot of people hear the word IRS and they just freak out.

They're like, I don't even know what to do.

That's not what we're talking about here.

But what it means is when those nerves show up and listen, a lot of people get nervous when it comes to taxes.

You got to have something to stand on.

You got to know what you claimed and you got to know why.

And that's not rocket science.

That's not that complicated.

You just have to have the records to back it up.

That's the confidence.

You don't have to live in fear of the IRS if you have the records to back it up.

That's the confidence.

Not bravado, not pretending like you're some untouchable, like some gangster.

It's knowing that your house is in order so you're actually asking the right questions, which means you're closer to that than you think.

So now I'm going to ask a question.

If you're listening to this live, if you're catching us on Facebook or on Clubhouse or Facebook too, we're on Facebook, LinkedIn and YouTube.

If you're self employed, do you keep a mileage log?

Do you have those receipts for your business deductions?

If you do, drop it in the chat.

I'd love to hear from you.

And then we're going to get to an article that addresses this directly.

But if you feel like contributing to the show today, or if you're watching this after the fact, just put it right in the comments.

Do you have receipts?

Do you have that mileage?

If you're self employed, those are the things you've got to have to protect yourself.

Which leads me to this.

This email connects directly to what Forbes covered earlier this month.

Forbes magazine.

And the headline of that was simple.

It says, the IRS is watching more closely and the checklist it lays out is worth going through.

And that's what we're going to do right now.

We're actually going to go through this checklist that Forbes put out because I found it to be really airy interesting.

Most people file their taxes without thinking much about what the IRS will see when they process the return.

They assume if they're doing no, if they're not doing anything illegal, they're fine.

And that's mostly true because there are patterns that draw scrutiny even when nothing is technically wrong.

If you know what those patterns are, that's the difference between filing with confidence and filing with anxiety.

Here's what the findings actually show.

As I said earlier, the IRS is using much better technology than it had even a few years ago.

Yes, they've got fewer agents, but the technology is making up the difference.

Those AI assisted systems are cross referencing your return against employer data, against your bank records, any third party reports, and it's doing it automatically.

That gap between what you report and what the IRS already has from those sources is now smaller than ever.

But let's talk about the checklist of what gets flagged in 2026.

This is right from the article.

These are the things that consistently get flagged.

Number one thing is income mismatches.

They're the top.

If Someone files a W2 under your name and Social Security number or a 1099 and it doesn't go on your return, guess what?

Your return is going to get flagged.

The system's going to know that this and they're going to send you one of those friendly notices.

Hey, we looked at your return and we noticed you didn't report this.

Now, honestly, usually it doesn't come out till about a year later.

Seems like they're moving up a little quicker now because I'm seeing more of those notices now in my practice.

But that's the most straightforward trigger and the most avoidable.

So make sure W2s, 1099s, any income that's reported under your Social Security number, make sure you're putting that on your tax return.

Here's the second thing.

Self employment income, which is exactly what the listener mentioned today.

It draws more scrutiny than the W2 income because it's self reported.

Think about that for a second.

You got an employer that's reporting W2 income.

You've got other companies that are reporting 1099s.

But the schedule C that self employed small business person is all self employed.

It's like the honor system.

There's no employer verifying the numbers.

And the IRS knows that.

And because they know that, they look more carefully at those business income and expenses.

That's the reason they're doing it.

Here's another one on the checklist.

They mentioned the home office deduction.

Sounds like I'm picking on you.

But these are the things that they really say.

It's consistently one of the most audited items on the return.

The reason that it's audited is the legal standard is strict.

As I said earlier, the space has got to be used regularly and exclusively for business.

Now they define regular means often.

Exclusively means nothing personal.

And both of those conditions have to be true.

Hey, like I said, I've got a grandson.

Now, if I had a bedroom at my house that I claim was my, quote, business, and there's a crib for my grandson, or there's A bed for my grandson.

That's not going to qualify because it's not exclusively used for business.

That's where it's so important.

Well, let's move on to the next one on the checklist, and that's vehicle expenses without documentation.

Again, another consistent trigger.

Claiming business mileage is legitimate.

That's fine if you have a documented reason.

I want to see this customer.

I want to do this, I want to do that.

That's fine.

Have that mileage.

Look, there are some great online tools, there's some great apps that will actually do that for you now.

So I would encourage you to do that.

But claiming 100% business use without a mileage log is a red flag.

Now, you might say, ralph, well, wait a second, I've got a business vehicle and I've got a personal vehicle.

I love that, because then I can prove to the irs, hey, we've got a business truck, then we got a personal vehicle that works.

But have that mileage log have a calendar where you went, who you saw, what the beginning odometer was, what the ending odometer was.

So you don't run afoul of the iris when it comes to documentation.

All the things we talked about are all about documentation.

Here's another red flag, and that's refundable tax credits.

This is the kind of credit where you actually get money back, even if you owe nothing.

These have come under significant scrutiny the last few years because, honestly, the IRS is sending out money over and above what they've collected.

This is a big deal.

This is the Earned Income Tax Credit.

That's one.

It's reviewed very strictly.

In fact, what I have seen is there are times when the IRS is actually holding up a refund and only issuing a part of the refund that until they verify Social Security numbers, date of birth, children, all that kind of stuff.

There is a much stricter standard on that than most of the other returns.

Here's another one that hit the list, and that's cryptocurrency.

A lot of people don't know about this one.

That is a growing focus of this exchanges, where you take these cryptocurrencies like, I can't think of exactly.

Coinbase is one of them that comes to mind.

Robinhood's another one.

They are growing in the focus.

And now the exchanges, those companies that you're working with, are reporting directly to the irs.

So if you've sold or traded or used crypto and didn't report it, this mismatch is going to show up.

You Might be saying, wait a second, Ralph, but if I just spent the money.

Well, see, here's the problem.

I don't want to go on a tangent, but cryptocurrency as it currently stands is like selling stock.

Believe it or not, it's a capital gain issue.

So you've got to make sure you're reporting that.

One of the things, when clients come in to me, I said, hey, do you have any crypto?

Did you sell any of it?

Did you spend any of it?

Any of those things?

I need to report those things.

What the Forbes piece makes clear is that none of this means you're going that you're doing something wrong.

It doesn't mean that.

It means your return needs to be able to tell a consistent documented story because that's what the IRS is checking.

I think about it like this.

Your tax return should stand on its own.

It should tell a story.

That story should be backed up by your documentation, by your records, by your mileage logic, by your receipts.

That's the thing.

There's a couple quotes I want to pick out on here.

This is from Kiplinger.

It says Schedule C is a treasure trove of tax deductions for self employed individuals.

But it's a gold mine for IRS agents who know from experience that self employed people sometimes claim excessive deductions and don't report all their income.

Catch what that just said.

The IRS is aware of this.

They know from their experience that this is a place where they can go find money for the Treasury.

Here's another quote.

This is from a fellow by the name of John Aspa.

He's a CPA and partner at kf.

Excuse me, pkf.

O' Connor Davies, llc.

This actually comes from cnbc.

He said this.

My best advice is that you're only as good as your receipts.

Well, I can't disagree with that.

It has to stand on its own.

It's got to have those receipts.

And here's another quote.

It's from Robert Levy, he's a tax professional.

Again from CNBC.

It says the W2 is much less likely to get audited than a self employed person.

By far.

Absolutely agree with that.

But here's my take on this.

The thing that strikes me about this checklist is how many of the triggers are documentation problems.

Just about every one of these is just a function of having your documentations in place.

They're not deduction problems.

The deduction is usually perfectly legal.

The problem is that the person claimed it without keeping the receipts or the logs to back it.

Up.

That's avoidable.

You don't want to do this after the audit notice.

You need to do it now before you file.

Because a financially confident Christian isn't someone who never gets audited.

Boy, I'm tripping up my words today.

I got the grandpa in my brain.

Let me start that over again.

A financially confident Christian is.

Isn't someone who never gets audit.

You can be doing things all the right way and still get audited.

I have a bunch of clients that can tell you that.

But there's someone who's not afraid of it when they do get audited.

Because if the IRS ever does call you, you can go pull a folder, show them their work, show them the documentation.

Now, I'm not talking about perfection.

All of us make mistakes, but have that documentation.

Confidence in that comes from preparation.

And.

And preparation is available to every single person who is watching me right now.

So let me ask this question in the chat.

Have you ever been audited or do you have a deduction you're not 100% sure about?

So happy to listen to your comments there.

If not, we're going to move on to our next question and this next question.

Let me just check and see we've got anybody that wants to make a comment.

I don't see any right at the moment.

Well, let's go ahead and move on.

So here is our next listener question.

It's another listener email.

Listener writes this.

Ralph, I've spent the last three years planning my Social Security start date down to the month.

I know exactly what my benefit will be at age 67.

I've run the numbers, comparing different ages, and I'm confident in my decision.

I'm just going to pause there for a second.

That's great.

You're confident in your decision.

That is a good place to be.

We talked about this last week on the show, actually, but they continue.

What I didn't think about and what someone just mentioned to me is the actual process of filing.

They said there can be delays, login issues, and paperwork problems that push back your first check even if you do everything right.

Is that true?

And if it is true, what do I need to do to make sure I actually get paid on time when my date comes?

Thanks, Ralph.

I would love to hear your thoughts.

Thank you so much for sending in this question.

And it's one that a lot of people don't think about.

They think magically.

When they hit that target age, they're just going to pick up the phone or go online and the Social Security administration is going to say, oh great, we're going to send your money right away.

But it doesn't work like that because you've done the hard work here, you've planned carefully, but you're finding out there's a whole separate set of logistics that you didn't account for.

And the consequences of getting it wrong are real.

And here's the thing, you're right to ask this now.

And the fact that someone mentioned it to you tells me that they are aware of this situation too.

They've given you a gift.

Because this is one of those things that can catch even well prepared people completely off guard.

Here's the problem.

Most people treat Social Security like a decision that automatically converts into a payment.

Once you make it, you just think you're going to pick up the phone or go online just magically it happens, you decide, you file, you get paid next month.

But in reality, it doesn't work like that.

There are a ton of steps between the decision point and that first check.

And any one of those can cause a delay.

The biggest one right now is account access.

And let's talk about that for a second.

Because a lot of people are taken back by this.

The Social Security administration has moved online account access to login.gov or ID me.

As soon as you hear this, you're like, oh, wait a minute, Ralph, I heard about this.

ID me.

If you haven't logged into your My Social Security account recently, you might find that your old credentials no longer work.

And here's the thing, that identity verification, which I think is a good thing, once you get through it one time, it's not an issue.

The ID me works fantastic.

I've done it with myself, I've done it with many clients.

But it does take a few steps and the recovery options can be tied to a phone or email that you no longer use.

That's the other side of this.

And I've talked to people who found out this week when they were trying to file.

This is the worst possible time to discover it.

That's the first issue, is not having access to SSA.gov if you have Social Security.

If you're getting, if you're paying into Social Security, do yourself a favor, go and set up an account now, get your I.D.

Me.

Make sure all your recovery information is correct, your phone number is correct, your email address is correct so that you don't run into this problem in the future.

That's the first issue.

The second issue is your earnings record.

The Social Security mansion uses your earnings history to calculate Your benefit.

That's how Social Security works.

If you don't know this.

Basically they look at your lifetime earnings.

That's what determines how much you collect in Social Security.

The problem is most people never look at that.

And there can be errors, there can be years with missing wages.

There could be self employment income that wasn't posted correctly.

Here's a big one.

For people who have been married, a name change can cause a mismatch as well.

You might not get credit for the years that you paid under a different name.

And here's the issue.

Correcting an earnings record takes time.

It's not something magical.

Let's snap our fingers.

It's going to happen.

If you find a problem the month you're trying to file, it might not get fixed before your start date, friends, it might not get fixed for six to eight months.

And here's the practical rule that Kiplinger published recently.

And I think everyone approaching retirement needs to hear, you gotta start this filing process and listen to me on this.

This is super important.

Start the filing process four months before you want benefits to begin.

Four months.

Not 30 days, not two weeks.

Four months.

That's how much of a buffer you need to handle a login problem.

If there's an earnings issue, maybe there's a direct deposit snag or, or any other paperwork complication without it affecting your first payment.

And here's something a lot of people don't know.

The Social Security Administration allows you to apply for up to four months early.

Even if so, for example, if you say I don't qualify for full retirement benefits till age 67, well, the Social Security administration will let you actually start that filing at age 66 plus.

What'd that be?

Eight months.

So you can do that.

They'll give you that window.

Here's one more thing you need to understand.

If you have spousal or survivor benefits involved or if you had self employment tax in those years or maybe you had a period where you're working abroad.

Those situations actually make it more complex.

If you have a very simple filing situation, you're going to need less time.

But even a straightforward single person claiming can hit an unexpected friction deduction.

So build in that buffer and I hear what you're saying.

This listener spent three years building a strategy that's real work.

But being financially confident means finishing the job.

And that job unfortunately includes the logistics of this.

Just knowing your numbers isn't enough if you can't file on time.

That four month window is how you protect everything you built.

So do the strategy work like you said, but don't forget to do the logistics work as well.

That's how you cross that finish line the way that you intended.

So let me ask the chat now if you're listening to this after the fact, have you ever checked your my Social Security account?

Were you able to access it?

Did you get the information you were looking for?

It's super important.

Do you know what your earnings record shows?

It's really important that you do that.

And we found an article about this as well.

This email connects directly to what I mentioned a little while ago, a Kiplinger's article that was covered earlier this month.

And the story they open up with.

One I think a lot of people will recognize people who plan carefully for retirement but treated Social Security following itself as an afterthought.

The math was right.

You're right and you're doing it.

Your timing's right.

And then something technically went wrong at the worst possible moment and your first payment was delayed.

Because what you got to understand, a lot of people going into Social Security, they are banking on that income.

They've got bills to pay.

That's the issue.

That's why you got to plan this ahead of time.

There was a financial advisor writing for Kiplinger.

He described a client well prepared.

This client had spreadsheets, had confirmed their strategy.

And he discovered the week he planned to file that he was locked out of his Social Security account.

Like I talked about, that ID me issue, and he was about to board a flight.

His login credentials were tied to a phone that he replaced years earlier.

His recovery options didn't work because he didn't have access to those emails anymore.

And, and he couldn't access his account.

He couldn't even estimate his estimated benefits and he couldn't file.

And unfortunately, that's not a rare situation.

It's what happens when people treat the filing process as an administrative checkbox instead of its own planning step.

Now, this piece lays out seven steps to avoid that problem, the ones most people skip.

First thing, like I said earlier, the first thing you want to do is log into your my Social Security account right now, not when you're about to file right now.

Create it as if you hadn't already.

If you don't have an account, go ahead and create one.

Then do this log in a second time a week later just to confirm you have access.

Make sure everything is working and you don't have to wait till you're close to retirement age to do that.

You can do it whenever you Want.

Here's the second thing I'm going to encourage you to do.

Make sure your recovery email and your phone number are current.

Unfortunately, people change email addresses and people change phone numbers.

So make sure you've got those things in order so you don't run yourself into a problem.

Save those backup codes, put them secure somewhere else.

The third thing you want to do is make sure you check your earnings records.

Now, you don't have to audit 50 years of work history, but just look for obvious red flags.

Maybe there's a year that shows zero income at all and you're like, wait a minute, Ralph, I know I was working.

Or maybe there's a year that's dramatically lower than the ones around it.

If something is wrong, you're going to have to go get your tax returns.

You're going to go get copies of your W2s from that year and contact the Social Security Administration.

Now this is where a lot of people get in trouble because they'll say to me, wait a minute, Ralph, you said I only have to keep seven to 10 years of tax returns.

Yeah, this is where that might be a bad advice because if you find out that your records are missing, and that's why I encourage even young people, start looking at your Social Security earnings records or right away, check it every year.

I don't think you need to go in here multiple times here, but check it once a year.

Make sure your tax information from the prior year is posted.

That way you're not waiting till 40, 50 years down the road.

Now, of course, some people would say Social Security is not going to be around.

I actually think it will be.

But do that right away if you find errors in your record.

The problem with that is it can mean you get lower benefits.

Another thing I would encourage you to do is build what they called in this article a claiming kit.

And I think this is a great idea.

Just get a folder, whether that be physical or digital, with your Social Security card.

Anytime you've been married or divorced, put those in there as well.

Put your banking information for a direct deposit and then a one page summary of your plan.

It's not like you're trying to become your own Social Security office.

You just want to make sure you're not scrambling for paperwork on filing day.

And as I said earlier, and this article nails it too, use that four month window.

Since they allow you to apply up to four months ahead of time, go ahead and do that.

Because when you fire early, it doesn't mean your benefits start early.

They're going to give you a targeted date, even if you're filing early.

But that allows you to make sure you've got all your ducks in order so you don't have an issue.

And I got a couple quotes here, too.

One of the Kiplinger readers described by advisor Ray Harris MBA said this My plan is solid, but I'm locked out of my Social Security account.

I can't get my estimate.

And Ray, we're boarding in two hours.

That's where this actual story came from.

Now another one says Social Security isn't only a math problem, it's also a logistics problem.

That is so true.

And a great claiming strategy is like a great itinerary.

And this is why I think this is really kind of an interesting way they put this together in the article.

A great claiming strategy is like a great itinerary.

It looks perfect on paper until you realize your passport's expired.

Now, if you've ever had that circumstance, I haven't personally, but I've heard of people doing it or your login doesn't work or that one document you need is in a safety deposit box you can't access.

Well, here's my take on this whole thing.

The strategy work and the logistics work are both real.

You got to do both.

You got to make sure this is the right time to file, which is what we talked about last week.

So if you missed last week's show about the perfect age to file, go check that out.

You can find all of our episodes@financiallyconfidentchristian.com so that's piece A.

Piece B is the logistics of this.

People spend years on the strategy and they spend two minutes on the logistics.

Those two minutes can cost you weeks of income if something goes sideways.

That's the reason they recommend that 4 month window for exactly that.

But let's stick into why this is financially confident, Christian, why this is important.

Becoming financially confident with Social Security isn't just about picking the right age to claim.

It's about making sure that the follow through happens.

And people who get this right aren't smarter than other people.

They're just planning the logistics.

They're starting early.

They logged in before they needed to.

They built that folder before the deadline.

Confidence here is just preparation with a calendar attached.

And I think this is a really important question because a lot of people don't think about this.

They say, well, Ralph, I've been working for 50 years.

I'm ready to claim my benefits now.

How do I make this happen?

So if you're planning to File for Social Security.

Make sure you take advantage of this.

Do that four month window.

It's really a smart thing to do.

Now let me take a look at the chat, see if we've got any comments.

We've had a couple people popping in and out.

Thank you for doing that.

But let's go ahead and move to our third listener question.

I'm going to take a sip of tea here because I'm a little bit dry today.

All right, so this is another listener email, and this one writes, this says, dear Ralph, my daughter is 34 and she's been going through a really hard stretch financially.

Rent went up, her hours got cut at work, and she ended up pulling money out of her 401k to cover the gap.

She said she had to do it because there was nothing else to do.

And watching her do it was hard because I know there are penalties and I know she's taking money from her future self to pay for today, but I also felt like she had no other choice.

So, Ralph, my question is really twofold.

First question is this.

What is she actually losing by doing this?

I'm not talking about the penalty, but the full picture.

So number one question they're asking me is, what are you actually losing by doing this?

Secondly, is there anything I should do to make sure my own retirement savings are protected if I'm ever in a similar situation?

Thank you, Ralph.

Would love to hear your thoughts.

And thank you for sending in this question.

It's a question that a lot of people don't think about until it's too late.

And I get what you're going on here.

You're grieving a decision that you watched your daughter make under real pressure.

Your daughter was in that situation where, like she told you, she didn't think she had any other options.

And it's not that you're trying to judge her.

It's not about judgment.

You want understanding.

But at the same time, I think there's a fear part here.

You're afraid the same thing could happen to you.

So I want to start by saying something clearly.

Your daughter wasn't being irresponsible, you just wasn't.

She was under pressure and she used the tool that was available to her.

And that matters.

The context of why your daughter did this matters.

And what happened isn't a character failure.

A lot of people say, well, if I'm in tough times and I go take money out of my retirement, that's a failure.

It's not a character failure.

But you also do have to understand the full cost of what happened, because it's worth understanding.

And I'm not doing this to shame anybody today, but I'm doing it because it helps you make different choices next time or maybe avoid being in that position in the first place.

So let's get into the nitty gritty details of this.

Here's what actually happens with an early 401k withdrawal.

The obvious part that you mentioned.

There is a 10% penalty.

If you're under 59 and a half and you take a hardship withdrawal.

The IRS charges a 10% or early withdrawal penalty on the amount you take out.

So, for example, if you take out $10,000, that's $1,000 penalty right from the beginning, gone out of your money, you're done, that money's gone.

But then the withdrawal also, and this is the part that people don't think about, it's kind of the double whammy, if you will.

The withdrawal gets added to your taxable income for the year.

So not only do you get paid with a 10% penalty and see a lot of people say to me, ralph, well, I did this, but I already had them take the taxes out.

But what I find is that usually they only take out the penalty, or maybe they take out 20%, which is why the second part of this matters.

Depending upon your tax bracket, that can mean an additional 12%, 22%, 32%, 37% in additional federal tax.

And don't forget about the state tax on top of the 10% penalty.

So that $10,000 withdrawal might actually net you only $6,500 or $7,500 by the time the government takes their share.

And don't forget about this.

A lot of states tax this as ordinary income as well.

But here's the part that is hardest to see, though.

You don't see this because it doesn't come out right away.

And that's the lost growth.

And we got to spend a minute here.

Most money inside a 401k gross tax deferred, which that means is you put the money away pre tax and it continues to grow, compiles, all that kind of stuff just grows beautifully tax free.

Well, if you take that $10,000 withdrawal at age 34, that creates a problem because if it had stayed invested and growed at even an average rate of 7% over 30 years, you actually are taking out $76,000.

So you might say, wait a second, Ralph, you say, I'm only taking 10,000 out.

Yeah, but the problem is the cost of doing that a Lot of people don't think about this one.

The cost of doing that because of the lost income earned in that money for that period of time.

You retired $76,000.

Now, I want to get to the listener's question directly.

Your own situation.

The protection doesn't come from when you reach that point.

It comes before the crisis, not during it.

The best defense against ever needing to raid retirement savings is a separate emergency fund.

If you listen to my daily show, you know, I talk about emergency funds all the time.

You got to have three to six months of living expenses in a regular savings account, not in your retirement accounts.

Retirement accounts are great.

I will champion that till the day I pass away, put the money away for retirement.

But you've also got to have that emergency fund.

Because when that fund exists, if you have a job loss or your rent goes up or you have a surprise medical bill, you got somewhere to go that doesn't cost you that 10% penalty and decades of compound growth.

So if your daughter doesn't have that emergency fund or if you don't have it, what I would do right now is build that first.

That's got to be your priority right now, not more retirement contributions.

Yes.

Ralph is going to say this.

You may need to back down those retirement contributions right now to build up that after tax cushion, that emergency fund.

I'm not talking about investing it.

I'm talking about a cash cushion in a place that you can actually reach it without a tax bill.

Because that's the issue.

So many people put all of their eggs in that retirement basket.

And I get it because it reduces your taxable income in the year that you do it.

A great, wise tax strategy until you need the money.

And then when you need the money, the only choice you have is to go raid that retirement account.

And unfortunately for most people, you're going to end up losing about 35 to 40% of whatever you take out.

That's a big number.

But here's what I want this listener and I want her daughter to hear.

Financially confident Christians aren't people who never hit a wall.

That's why I said there's no judgment here.

There's a lot of people out in the world that I live that want to judge people, they want to criticize people, they want to call them stupid.

You will never hear that from me.

You are going to hit walls.

Sometimes in your financial life, things like that happen.

But the truly financially competent ones are, are people who are building something between themselves and the wall before the crisis arrived.

That's Something like I talked about is that emergency fund.

And it's not complicated to start.

Even a few hundred dollars sitting in a separate account you don't touch is the beginning of a different kind of security.

It's clear to me, based on your question, your daughter didn't have that kind of cushion.

So the goal for both of you is to make sure that the next hard season comes.

And guess what?

Most people will experience hard seasons in their life.

Build that cushion so that you got somewhere to go besides that 401k plan.

And we actually found an article with this one.

This email connects directly to what?

There's a company out there called Moneywise and they covered this in March.

And the data they reported is striking.

Now, it wasn't striking because it was surprising.

It was striking because what it says about where a lot of families are actually right now, this is what the research showed.

People who are doing the right thing by saving for retirement but are under enough financial pressure that they're pulling the money back out before retirement even comes.

This is a thing.

Yes, they've got the savings, but they also have the needs.

And those withdrawals are happening now more than ever.

Vanguard says this.

Vanguard published its How America Saves.

This is a 2026 report.

And one number stood out to me in 2025, 6% of 401k account balance holders in its plan.

These are the plans that Vanguard administers took a hardship withdrawal.

So 6%.

This was the highest rate ever recorded, up from 4.8% in 2024.

More than doubled where things stood before the pandemic.

This is six straight years of increases.

Now, a hardship withdrawal is different from a 401k loan.

Let's talk about that for a second.

Because a lot of people, if you have an option, you can take what's called a 401k loan, but these are actual withdrawals pulling the money out of the account.

Here's the way a loan works.

If you do a loan, you're borrowing from yourself and paying yourself back.

The best part of that is that's not a taxable issue.

Now, there is a little bit of a trapdoor there.

If you take one of those loans and you change employment, you get fired or you leave somewhere, you have 60 days to pay back that loan or it becomes an effective distribution.

That will be a topic for another show.

But with the loan, you're borrowing from yourself and you're paying yourself back.

Now, with a hardship withdrawal, the money comes out and it never goes back.

You pay the penalty.

As we Talked about that 10% penalty, you pay the taxes and you permanently lose whatever the money would have grown into.

Like we talked about that $10,000, that really is $76,000.

But let's get a little deeper because let's talk about what's driving this.

Why are more people taking these hardship withdrawals and why are people getting themselves into this?

I honestly think the number one thing is financial pressure from multiple directions.

We are living in very difficult economic times, and this isn't meant as a judgment.

This is the reality on the ground.

Rent's increasing, people have medical bills, there's a ton of job instability, and costs are rising.

None of this stuff is letting up.

And according to Vanguard's research, hourly wage workers are disproportionately affected.

Which it didn't surprise you when I read this.

42% Of hourly workers who leave a job cash out their 401k entirely instead of rolling it over.

Do you understand what I'm talking about there?

42% Of people who are working hourly and they leave a job, maybe they're going to get a better job, they're going to another place.

42% Are cashing their money out entirely instead of letting it roll forward.

And when you do that, a couple things are happening.

Number one, you're getting nailed on taxes.

Second thing, that money's coming out of your investment and it's not going to grow for the rest of your time.

That you're working.

That number right there should stop people in their tracks.

The contradiction in data is worth sitting with.

Think about this one.

The average 401k balances actually rose by 13% towards 2024.

Now, I think that's driven by strong markets and steady contributions.

So on paper, and this is what this article says, on paper, retirement savings look healthier than ever.

But underneath that, there's a growing share of people who are cracking those accounts open to cover today's expenses.

Both things are true at the same time.

There's more savings and there's more people taking the money out.

And the cost is what it is.

It's the penalty, it's the tax.

And that's lost growth that we talked about.

That $10,000 withdrawal at age 34 is $76,000 less at retirement.

That math doesn't change based on why the money was needed.

Which leads us to the protection.

This is so important.

It's the same every time.

You probably think I'm beating a drum that doesn't stop, but it is so very critical.

This is the difference between people who are successful and not successful with their finances.

And again, I'm not judging you.

A separate emergency fund, cash in your savings account, not that retirement account money that you can reach out and grab when you have that rough month or you have that unexpected expense money that you can grab without a penalty.

And what they find is when people have that buffer, they don't have to touch their 401k because for so many people, and the numbers show it, those 401ks have become an emergency fund by default.

And that's a big penalty for taking that.

Like I said, between 35 and 40%.

Money wise.

Citing Vanguard's How America Saves reports, says last year was a record breaking year for early 401k withdrawals.

It's just sad to me, and I Already mentioned this, 42% of hourly workers cash out their 401s when they switch jobs.

If you're changing, if you're quitting your job, one of the worst possible things you can do is cash out your 401k, roll it over into your own IRA, roll it even to your new company 401k.

It's really important that you do that now.

I noticed somebody put something in the chat.

Dave, thank you so much.

And he said, congratulations, gramps.

Yeah, I'm still not sure I'm embracing that term yet.

But I'm going to either way because I know little Carson's going to be looking up to me before long.

He's going to go, grandpa or Pop Pop, whatever it is.

I'm gonna probably tell him, call me Pop Pop, because that was my closest, closest relationship in my life.

But let me take my take on this.

What strikes me about this data isn't the numbers.

It's the story behind the numbers.

That's what I say on the show.

My story is all about the people behind this.

We can look at numbers and math is great.

But what are the people behind this telling us?

People aren't pulling from their 401ks because they stop caring about retirement.

I really don't believe that.

I think people generally have an interest in putting away for retirement.

I'm 53 years old.

Some point I might retire.

I don't know.

I like what I do.

So I don't know if I retire at all.

But I don't think that's why people are doing this.

They're doing it because they're out of options and things need to get paid.

That's a real situation.

You may be listening or watching this right now and you're in this very situation.

The answer isn't to shame anybody.

You might listen to other financial experts and they're going to tell you, oh, you're stupid, you shouldn't do.

You will never hear that from me.

I have compassion for people.

I have a heart for helping people.

So I have to give you tough love right now.

The answer isn't shame.

It's building that buffer before the crisis so that 401k or those retirement endings stay protected and retirement is still possible.

And that's exactly what we're building towards in this community.

Not a financial life where things stop happening.

Things are going to happen.

They're not going to stop happening.

But I want to help you get to a place where when they do, when those tough times happen, you've got options.

An emergency fund doesn't feel like progress the way investments do, but it is progress.

And when that crisis arrives, it's that thing that keeps you from making a $76,000 mistake to solve a $10,000 problem.

Because that's really what it comes down to.

You've got a $10,000 problem and you're paying $76,000 to do it.

That's what financially confident actually means.

Well, like I said today, I'm going to check the chat here one more time.

I want to appreciate everybody that showed up today and made comments.

Thank you all for being here.

We had three questions today.

Three different kinds of pressures, but the same thing was underneath all of them.

Having a plan before the moment a crisis arrives is what changes the outcome.

That is really the truth.

Have that plan.

So for that self employed listener worried about her tax return, pull those records now.

Every deduction you claimed, make sure you have documentation.

The deduction isn't the problem, the missing receipts is.

And guess what?

You can fix that.

Don't wait till you get a letter from the irs.

Fix that now.

And if you're planning for next year, this is a great time to start putting your stuff in order to now now, for the man who's done everything right with Social Security planning.

Log into your Social Security account this week.

Check your earnings records.

Start your application four months before your target date.

Your strategy is solid.

I love what you said about how you decided when to take the money.

Make sure you've got the logistics to match it.

And if you're listening right now, go make sure you have access to your account.

Check your earnings records at least once a year.

And for the mother watching her daughter work through a hard situation and and for her self, start an emergency fund.

If you don't have one do that three to six months of expenses in a regular savings account.

Now, you don't have to get to three to six months right away.

Start off with $10 a week.

Start off with $25 a week.

And just let that grow.

Make it automatic.

Carve it out right away, take it off the top.

That fund is what's going to keep your retirement savings protected.

When life gets expensive, just take one step.

Any one of these this week.

You don't have to have it all figured out.

You just have to keep moving.

That's what being financially confident looks like.

It's not about perfection.

It's not having a perfect portfolio.

Not a life without hard seasons.

We are going to have seasons that are difficult.

It's showing up.

It's asking the right questions and making one more good decision today than the one you made yesterday.

That's the whole thing.

That really is the whole thing.

Now, before I let you go, I want to remind you that every day we have a daily show.

It's called Financially Confident Christian.

It drops every morning.

It's a short episode, about 10 to 15 minutes.

We talk about real topics just like this.

You can find all those episodes@financiallyconfidentchristian.com and like I said, if you want to go deeper with a community of people who take this seriously, we have a Patreon site.

You can join that by going to financiallyconfidentchristian.com join now.

It doesn't cost you a dime to do that.

If you would like to support the show, you can do that.

But you can go to our Patreon community, join it.

We put content out there.

It's a place you can ask questions.

I jump in there and answer questions.

Again, that's@financiallyconfidentchristian.com join.

So don't forget, same time next Friday, 1pm Eastern.

I will see you then.

Thank you so much for joining me today and I wish you a blessed day.

Have a great weekend.

We ride, We rise.