Cashing a 401K ($100,000) to boost your present business! Your Thoughts?

[john2k]

Are you able to finance an expansion in your business rather than using your 401k money? That might be something to consider.

[Jake03]

Originally Posted by Floyd Fisher

That's a bad idea if I ever heard of one.

1. The penalty is taken out when the early distribution is made by the institution, not when the 1040 is filled out.

2. Taxes go up starting in January (Bush tax cuts expire).

My advice is don't do it at all, but do a loan against it instead. But if you feel have to do it, do it now.

Maybe things are different for you but the only thing withheld at the time of distribution is 20% for taxes. The distibution amount doesn't matter.

The penalty and the reconciling of taxes are done through the 1040. I've done and that's the way it worked.

Jake

[Karen Blundell]

you are faced with a tough decision. That being said....

• With several states in the US already bankrupt, whose to say you will even have your 401K?
• If you are smart with your money and your business, you could potentially create a 7 figure income in a years time and you will be able to more than double your savings
• Entrepreneurs are risk-takers. No risk..no gain...

so I'm saying...I would use the money. Or some of it, anyway. He is already running an internet business. If investing some money into it means it takes his business to the next level, why would we not advise him to invest in his already solvent business?

just my 2 cents

[seasoned]

The 20% withholding is if you come into a big windfall, or the IRS requires it as a special case(For the person). That is NOT a penalty, or payment of tax, but a PREpayment of tax. It is like the payroll tax deduction.

The 401K tax fee is a PAYMENT of tax, and you can't get it back. It is a payment. It IS made on the 1040, and the tax is based on what that return says you owe. As I recall, the 401K is treated as regular income. That makes sense, since no income tax was paid. Of course, there is the penalty also. THAT is assessed like 30 or 60 days after the withdrawal if you can't prove it has been transferred to an approoved account.

The 20% withholding is just that. It is a prepayment of tax. If that amounts to $90,000, and your tax return says you owe $10,000, then you get an $80,000 refund.

A good example of this is like the horse race winning windows at santa anita and, I imagine, elsewhere in the US. They have TWO types of windows. One is for low winning amounts, so a $40 win may net you $40. The other is for high ticket winning, so a $10,000 win may net you $8,000 and a $2000 payment to taxes.

ANOTHER is on stock accounts where you have to certify that you aren't subject to the 20% withholding, when you open the account.

Like I said though, contact a knowledgable professional if you want to WITHDRAW the money.

Steve

[MichaelHiles]

If you're hell bent to do it, and can borrow against it and pay yourself the interest rather than cash it out, try going that route.

That being said, when you understand the factor of time against money, and see the impact of your decision charted out 20 years, you'll probably decide against it.

See a CFP.

[Floyd Fisher]

Originally Posted by Jake03

Maybe things are different for you but the only thing withheld at the time of distribution is 20% for taxes. The distibution amount doesn't matter.

The penalty and the reconciling of taxes are done through the 1040. I've done and that's the way it worked.

Jake

Not that it really matters (because it all goes to the IRS anyhow), but are you sure that wasn't the 20% early withdraw penalty?

[vagabondette]

Originally Posted by Floyd Fisher

Not that it really matters (because it all goes to the IRS anyhow), but are you sure that wasn't the 20% early withdraw penalty?

The penalty is 10%, not 20%. The 20% tax that people keep referring to is the standard withholding that most plan admins suggest so you pre-pay at least part of the taxes before they come due rather than scrambling at tax time. Don't confuse the tax and the penalty - they're two very different things.

[James Pateman]

Hi Michael,

Mate, in my opinion the main thing is that it depends what you do with the money.

It might sway you if you asked the heaps of Enron employees whose 401k went from being worth half-a-mil to 20k almost overnight. You are probably better off looking after your own money, rather than someone else doing it.

regards,
James Pateman

[Jake03]

Originally Posted by vagabondette

The penalty is 10%, not 20%. The 20% tax that people keep referring to is the standard withholding that most plan admins suggest so you pre-pay at least part of the taxes before they come due rather than scrambling at tax time. Don't confuse the tax and the penalty - they're two very different things.

That is correct. However, depending on your company's plan the 20% isn't always optional. At least it wasn't for me.

You still end up reconciling it all at tax time anyway.

Jake

[Michael Mayo]

Originally Posted by Michael Mayo

Hi Warriors,

I'm borderline on cashing in my 401K to pay off a few debts and
restructure my on and off line businesses.

I do know that by doing so I will loose a lot of it to taxes but I
also know that it would help me to increase my over all profits.
It is a scary feeling!

What are your thoughts about doing something like this to
further yourself?

Hell, I know Dave Ramsey would agree with me!

Thanks for the replies,
Have a Great Day!
Michael

Oooops, Did I resurrect an old thread?

Okay, My thoughts may be once again heading in this direction...
What do you Warriors think about it now that times have even gotten worse?

Oh, Add this to the OP: I lost my day job over a month ago...

All Warrior thoughts are welcome,
Have a Great Day!
Michael

[Sojourn]

From experience - DON'T do it. If you can find any way to survive without it, do so. Taxes and penalties are huge. It calculates out to an expensive source of funding.

That being said, if you MUST, try to roll it to an IRA where you can withdraw as needed rather than all at once. Maybe you end up taking some for a month or two until you plug the gap but then you at least save the bulk of it.

Again, if you must, leverage it for all its worth. Try to use it to negotiate your way out of some other things at 80% or put it where it will earn something if you don't have to use it all at once.

Better yet, get a financial expert's opinion on how best to handle this. I'm a banker by previous trade but certainly not a professional in the personal finance arena.

Sorry about the job loss. Such challenging times for so many people. Maybe it's just the catalyst to better things for you, though? Hope so!

[Alan Petersen]

Now that you've been laid off, I would say even louder, don't do it.

Avoid all the taxes and penalties and roll it over into an IRA vs. cashing out. Right off the top your former employer will send 20% to Uncle Sam then your state will be dipping in for their share... that's probably another 10%, then you'll get hit with the 10% penalty.

So before you blink, 40% is gone.

Even if you're certain of the ROI, I would try something else v. giving the gov 40% right off the top.