401k question

thestartupman · #1 09/11/10, 10:03 AM

Has anyone withdrawn their 401k early? How did it work out for you? How bad where the taxes, and penalties? Any way you know of to reduce the penalties, and taxes?

Country Lady · #2 09/11/10, 10:38 AM

Take out the smallest amount you possibly can. Check into hardship withdrawals. There's special provisions for it being hardship.

Riverdale · #3 09/11/10, 05:43 PM

Cashed mine out when we moved. Lost about 45% of the total to taxes/penalties.

But we paid for our house and property free and clear, so I figure it was worth it.

Rick · #4 09/11/10, 06:07 PM

Can you take a loan against the 401K where the interest would be deductable on taxes?

ldc · #5 09/11/10, 06:20 PM

There's a way to take out the same amt each year, based upon yr life expectancy. There are still penalties and tax, but less. I took a loan against my 403B (like a 401K) once, but cdn't deduct the interest on the annual tax form, 15 yrs ago. You need to find someone w an actuarial table to help you figure out the life expectancy option, and what it is called! ldc

Bentley · #6 09/11/10, 09:00 PM

It's called the 72T. You can google "72T" and find several calculators that will help you figure out the best of 3 options, but this is for periodic withdrawals, not a lump sum. The 72T will allow you to withdraw your money without penalties, but you still have to pay the taxes. A 72T is set up for 5 years, or until you reach age 59.5 whichever is longer. They can be exceedingly tricky to set up, and if you break any of the IRS rules governing it, they will asses penalties back to day 1.

"IF" you do this, get a cpa involved. If you need a lump sum, then take a loan against your 401k. The other problem with taking a lump sum is that you will probably bump into a higher tax bracket, which just exacerbates the tax problem. IF you are over age 55, then you should be able to withdraw your money penalty free, but check with your plan administrator first.

It's really better to leave this money alone until you reach 59.5 if at all possible.

Good luck

Txrider · #7 09/11/10, 10:59 PM

Quote:

Originally Posted by Rick

Can you take a loan against the 401K where the interest would be deductable on taxes?

You can take a loan at 5% interest, and your paying the interest back to yourself.

NickyBlade · #8 09/11/10, 11:40 PM

We cashed ours out during my husbands first deployment... we paid 20% penalty, but got it all back with our income taxes since our annual income looked like so much less because you don't pay tax on your earnings while deployed. It worked out well for us... but we only had about 20 grand in it.

Silvercreek Farmer · #9 09/12/10, 10:51 AM

Why would you want to? There are very, very few reasons why it would make sense...

thestartupman · #10 09/12/10, 09:41 PM

I am about to make a complete change in my life style. I am taking a buy out from my place of employment. Move half way across the US, and start a new life, as self suffecient as possible. I believe I can do better with my money than the stock markets can do. I am just now at where I was with my 401k two years ago, and this is after putting money into it for the two years. My place of empoyment is about as secure as playing the lottery. Maybe I will be making a mistake, but I would rather try and fail, than to never try at all. I think I trust myself much more than I trust our goverment leadership. No, I am not only talking about the ones in leadership today, but nearly every one of them in the last 10 to 20 years.

Beeman · #11 09/12/10, 10:03 PM

A friend quit his job to change his life and get away from his terrible job. Cashed out his 401k and took a beating on the penalties, thought he had more money but the penalties took it. It's a year later, his business still hasn't gotten off of the ground. He's now working at another job at a much reduced pay with no benefits and all of the money is gone. I don't think he's even thought about the taxes he's going to have to pay yet. I'm betting he'd like to have a do over.
I'd roll the 401k into another acct. and possibly a CD, then borrow against it if necessary after you have cash flow.

thestartupman · #12 09/12/10, 10:10 PM

Trust me, this is not something I take lightly. I have been planning for this move for more than 3 years, and was only hoping for a buy out from work as a bonus. The plan is in place, and there is no turning back. Yes, I still have final decisions to make, but I am on my way. No, the 401k is not final, but I am leaning that way.

vahighlander · #13 09/12/10, 10:21 PM

startupman:

I thought long and hard about cashing out my IRA. I researched it, weighed it, lost sleep, etc....but I did cash it out. I think this country is in for REALLY rough times over the next decade or so. And I believe taxes will be MUCH higher in 15 years (when Im 62). I also believe the govt will find a way to take our accounts from us (google GRAS, guaranteed retirement accounts). I also believe the stock market is no place for anyone but the psychotic institutional players, who have played casino with our savings for way too long.

So it came down to- did I believe I could do more with my money- (pay off my 120 acre farm, build a new home with cash on that farm as well as outbuildings, buy a sawmill, tools, guns, etc...OR did I believe things would get much better from an economic and political standpoint for the next 20 years....if you believe taxes will be lower, policies will be better, America will pull out of this death spiral and that no one will come for your funds-- then leave it in with the rest of the sheep.....

401Ks were really designed by big corporations and then sold to the public (through the politician puppets) as a great retirement vehicle. What they were really after was a way to get rid of pensions and cut their expenses....

So our 3 legged retirement stool is really wobbly. 401Ks are a scam, pensions are almost non-existent, and social security is on shaky ground. Research it all yourself....and then follow the rest of the herd or cut your own trail.

thestartupman · #14 09/12/10, 10:43 PM

Vahighlander, your thoughts are pretty much mine. The one thing I want to add is that I plan to have no mortgage once this takes place.

vahighlander · #15 09/12/10, 10:56 PM

I know I have this land and home now...I have cut my mortgage debt by 85%...we are making the land pay its way with a custom sawmill and firewood business, honey production, mushroom business, hay production, orchards and a future vineyard....none of this would have been possible without that money. I sleep well at night now. I did set back a good chunk of it for taxes next April. Its earning a tiny bit in the local bank right now, where I know my banker. All the above seems like a much better bet for us given the new normal in America.

Things have changed- the old rules don't apply- we are in a new game now.

All these so called financial gurus are using their old tired playbooks...they are brainwashed by the system. And if everyone goes self sufficient and debt free on them- they have no value any longer. Guys like Matthew above have a vested interest in you keeping that money in the established boxes....he's a commercial banker.

thestartupman · #16 09/12/10, 11:01 PM

How much do you think you will be ablr to keep after taxes? I know someone above mentioned that they thought they lost about 45% to penalties, and taxes.

vahighlander · #17 09/12/10, 11:16 PM

I put 35% away in a CD for next April. Could get some nice farm write offs to help keep a little of that. Its all a dance with the IRS....If I need an extra little bit...I'll sell 10 acres of timber

vahighlander · #18 09/12/10, 11:20 PM

Keep in mind a 401K is tax DEFERRED...so you are going to pay a crap load of taxes on it when your old or now...there is no free lunch. The 10% penalty is a bummer....but I believe its worth getting out now.....I don't think there are going to be any real good stock, bond, mutual fund returns for many years....so I'll invest in me.

Molly Mckee · #19 09/12/10, 11:23 PM

You might want to talk to a good CPA or the IRS-it used to be possible to put land and property in retirement accounts--if it was completely paid for with the money from a retirement account. If done right it could save a lot in penalties.

Michael W. Smith · #20 09/12/10, 11:31 PM

You should only take out a 401(k) as a last resort. The penalties and taxes are set up to prevent people that need some money from taking it out of their 401(k).

You can probably figure penaties will be around 15%, and then you have the problem of possibly being thrown into a higher tax bracket due to the extra "income" you are receiving. (ALL of it will be treated as income. You didn't pay income tax on it going in, but coming out it's now time to pay.)

If you aren't happy with the "earnings" (if you have made any at all lately) you should be able to move it into safer areas (money market accounts, etc.). Likewise, if you are leaving your job and worried about leaving it "behind", you can simply roll it over into a regular IRA account and put it into whatever investment you are looking at.

If you are worried about the U.S. economy collapsing, well . . . . I suppose that could always happen, but it's unlikely. If you are looking at using the money to buy something, you have to figure out if leaving the money as is and taking out a loan is worth it or not. Currently, most stocks and investments aren't doing very well. But as quickly as they go down, they could turn around and your $20,000 you took out - and you only receive $15,000 - $17,000 (a high estimate) could quickly be worth $30,000.00 invested in the correct investment.

You need to talk to your human resource person and see what all penalties and fees you will pay. What about taking out a loan and paying it back (with interest) to yourself? - but that won't work if you quit jobs.

Be VERY sure of your decision before you do anything drastic. Know exactly what the consequenses are before you do ANYTHING! Are you really prepared to spend your retirement nest egg now?