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

15 years ago

Michael,

Wow, that's a tough decision.

I personally would not do it (I'm not much of a
risk-taker!) but I'm sure you'll get some powerful
responses here on why you should

For one thing, I would imagine that your 401
has taken a beating these past couple of years?
For that reason I'd hang onto it for a while to
see if it recovers.

Brian

Thanks
1 reply

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Floyd Fisher 15 years ago

Do not do it.

The penalties and taxes will literally kill you.

Get a loan using it as collateral instead. Just make sure you can pay it back, or kiss your retirement cash goodbye.
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jacktackett

15 years ago

If you really must tap this source of funds then I would second Floyd's advice and take a loan out instead of locking in any losses AND paying the taxes AND don't forget about the 10% penalty. Plus if have it dispersed right to you the agency typically withholds 20% and sends it directly to the IRS before it ever gets in your hands.

I agree with Brian that unless it makes a great deal of sense with appropriate risk/reward I'd recommend against it.

Your CPA can help itemize all the issues that you'll have to deal with, but be warned they'll try to recommend not doing this as well.

I know first hand as in the early part of the decade I had been laid off and needed money - and then was hit with some pretty hefty (think 6 figures) medical bills when my son was born with multiple birth defects. I had no choice, but the taxes, penalties, and withholdings were brutal.

If you play with the numbers and think you can create a nice return, then think about using Floyd's route to get some money, rather than just liquidating the fund.

Good luck and if there's anything I can do to help Michael just let me know.

best,
--Jack

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Scott Ames

15 years ago

You could look at it this way. Would you borrow $100,000 for 40% interest the first year to do what you want to do with the money?

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Tom Brite

15 years ago

I wouldn't do it!

Or if you are then take it out in small chunks so that you don't get so heavily taxed on it and yet are still paying off your debt too which i presume will lower your outgoing payments too!

Tom Brite

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Kay King

15 years ago

If you take out a loan against it the downside is that it won't be making any money on that part of your retirement fund - but the upside is you'll be paying interest to yourself.

If the loan is repaid you do not have a penalty but the taxes (max rate) are taken out when you get the loan.

Cashing it in would be the last resort - but borrowing from it might work if you can repay it.

kay

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Jake03

15 years ago

Well only you know what the pay back will be.

If you do decide to take it out think about:

A) Take it in January so the penalty and the taxes above the initial 20% won't be an issue until 2011.

B) Take half this year and the ohter half in January. Still delays some of the penalty and could reduce the taxes depending on your other income.

Jake

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1 reply

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Floyd Fisher

15 years ago

Originally Posted by Jake03

Well only you know what the pay back will be.

If you do decide to take it out think about:

A) Take it in January so the penalty and the taxes above the initial 20% won't be an issue until 2011.

B) Take half this year and the ohter half in January. Still delays some of the penalty and could reduce the taxes depending on your other income.

Jake

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.

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1 reply

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Jake03

15 years ago

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

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2 replies

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Karen Blundell 15 years ago
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
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Floyd Fisher

15 years ago

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?

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vagabondette

15 years ago

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.

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Jake03

15 years ago

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

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mmurtha

15 years ago

Oh Michael,

Do you really want to do that???

No, I wouldn't cash that in. You've waited this long waiting for it to get stable again. Now is the worse time to cash in. Besides, this economy is unstable too, so you make not make that back for a little while.

That's unless of course you have a full blown fail safe plan, that will make your money back. Do you?

If not, it's pretty risky.

Get a loan, and then pay the loan off quickly from the profits you earn.

Mary

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1 reply

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Michael Mayo

15 years ago

Hi Warriors,

Please don't think I was contemplating this out of desperation.
When the market took it's big dip I lost over half of my investment

I was just pondering the fact that if I had the money even with the
taxes and penalties that I could recover the losses then gain an ROI
at a higher percentage rate than my 401K.

Right now I would kinda be incline to bet on my self rather than someone else.

Thanks for your replies,
Have a Great Day!
Michael

PS. I believe I'll hold on to it for a little while longer. Heck I keep the wife for 30yrs! :p

Thanks
2 replies

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Dan C. Rinnert 15 years ago

If you're going to do it, now may be better than later. Some seem to think we may have a double-dip recession, so stocks being high now may be temporary. If you wait, it may be that stocks go down again and you have less to take out than you have now.

If you can swing it, I think it'd be better to hold on to it for the long term. But, if you think you're going to need to cash it in eventually, I think you should consider now rather than later.

Just something to think about, but remember that I'm not a professional investment advisor or anything, so my advice may only be worth two cents.
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ahlexis

15 years ago

Believe it or not, you sound like the type of person who can manage to have their cake and eat it too if you are willing to make a few mindset changes. In other words, do not say "withdraw" but "transfer". Don't say "take out of" but instead say "reallocate".

Mark Riddle pointed out something that is not so obvious to most people who have a 401k or IRA that you need to seriously consider. And that is, you don't have to take it out as a distribution in order to use and/or control it.

For instance, if you can take the funds you have in your retirement plan now and move them into a self-directed IRA you will find a LOT more investment options. For instance, if you have a self-directed IRA you can invest in almost ANYTHING that is legal to invest in. ALMOST ANYthing! For instance, you could invest in foreign real estate using the funds in your IRA. Not only does this move it beyond the taxing authority in a way that is completely legal (should the government decide they want to seize it from those who have "too much cash on hand" in order to fund their deficit funding)(hey, they're desperate for cash, remember?), it also allows you the opportunity to take advantage of the sure-to-come crash of the US dollar against other world currencies. Did you know that you can deposit your US dollars in Brazillian banks and receive 12% interest from the bank? I am not recommending that deposit, just showing you things that are happening in other parts of the world that a lot of people are not aware of. There is prime beachfront real estate available in Brazil in hot hot hot markets if you know where to look.

OK. Say you don't like Brazil. Consider Panama instead. There are unique opportunities in the hotel condo rental market due to shortages of hotel rooms and a long lag time in order for the bigtime developers to filll this shortage with the typical hotel rooms they build.

My point is this. You don't have to invest your IRA in the US once you have complete control of it via a self-directed plan. And with a self-directed plan, you don't have to take the big penalties you will get hit with if you withdraw it by receiving it in your own name.

But what you need is not just a CPA or other advisor. You need an advisor who is a specialist in using the self directed IRA's potential to your fullest advantage. It is even possible if done right for the self directed IRA to own the business and/or business assets if done properly. Yes, some types of IM businesses can be structured to qualify. Take a look; you'll be surprised at what you find.

Also, if you have an "IRA buddy" then it is possible to grow your IRA a lot faster by working in a team with someone who helps you increase your IRA while you help them increase their IRA. You are only allowed a certain dollar amount to contribute from your earnings, but your returns from investments the IRA can receive can be HUGE by proper structuring. For example, the IRA buys something that costs $100 to buy into but the return on the investment returns $10,000 as a profit on the deal. Profits are not contributions, so therefore the dollar amounts are not limited like your contribution. How can you get such returns? Options on real estate, for one way. What if the IRA were the holder of your hot hot hot domain names? One you potentially paid $15 or less could wind up being a 5 figure or 6 figure winner. As the buyer, all that money would go right back into the IRA. Food for thought.

Increasing your yield on all of your money is a lot sweeter than increasing your yield on the 60% or less left over after you pay the govt penalties.

Originally Posted by Michael Mayo

Hi Warriors,

Please don't think I was contemplating this out of desperation.
When the market took it's big dip I lost over half of my investment

I was just pondering the fact that if I had the money even with the
taxes and penalties that I could recover the losses then gain an ROI
at a higher percentage rate than my 401K.

Right now I would kinda be incline to bet on my self rather than someone else.

Thanks for your replies,
Have a Great Day!
Michael

PS. I believe I'll hold on to it for a little while longer. Heck I keep the wife for 30yrs! :p

Thanks

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Mark Riddle

15 years ago

Its probably more risk than you should be willing to take.

You need to consider what other assets you have that can generate a cashflow for you and convert to a lump sum for you.

The credit market is pretty tight, however regional credit unions and small banks are good choices for short and intermediate term loans or lines of credit.

However, if you find this is your best option, there are several situations where it can work for you.

If its available to you, don't cash out.

Transfer your funding to a Keogh or an self directed IRA.

Create a corporation and issue a bond, have your plan purchase the bond at market rate.

You don't want to operate the corp inside of your retirement account but simply being a bond holder (better than stock holder for various reasons).

I'm not a tax attorney and I don't play one on TV, consult your asset protection / estate planner for complete details regarding your personal situation and specific circumstances. This information is for educational purposes only and should not be consider legal or financial advice. Seek a professional for any and all questions.

Mark Riddle

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erazer

15 years ago

1) If you have retired, quit or been let go after you were at least 55, you can take money out of your 401k without penalty.

2) You can take money out from an IRA or 401k before you are 59 1/2 without paying penalties if you use Section 72(t) and take out "substantially equal payments" periodically based on your life expectancy.

If these don't help and you are confident your new venture will work, it may not be all bad to go for it. The fear of spending your golden years in the poor house should light a hot enough fire under your chair to make your venture a success! Seriously, some of our biggest successes come when our backs are to the wall.

Obviously, check with the IRS to make sure--(insert standard disclaimers here

). And good luck whatever you end up doing.

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Andyhenry

15 years ago

If you can't get your business making money after the amount of time you've been running it - I don't think the money will fix things.

I would suggest that may you could do a small loan against it to make paying your debts cheaper, but get the business making money on its own - afterall, that needs to happen anyway or the money would just be sunk into a hole and you'd end up with nothing.

Andy

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Intrepreneur 15 years ago

Is this to do with betting on stocks?

Mark
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Michael Mayo

15 years ago

Hi Andy,

My businesses are doing fine.
I never said that my business wasn't making money???

I was just bouncing ideals around and wanted to get other peoples
thoughts on the matter. Maybe I should have worded my OP a little better.

I don't need to pull the money out. The debts I spoke of in my OP are
actually my 23yr old daughters medical bills. Because of medical reasons,
she hasn't been able to work for more than a year. Presently, I'm
maintaining two households.

Some times you have to look at all your assets and re-evaluate their
performance. You have to ask yourself if they are performing well enough
and still on track for you to reach your goals. If not, then some thing
should be done by someone and in this case that someone is me.

I know many panicked when the market dropped and rushed to get their
money out of investments. That is not what I doing. I'm thinking that with
the money I could actually earn a better return over time by investing it in
my business.

Have a Great Day!
Michael

Originally Posted by Andyhenry

If you can't get your business making money after the amount of time you've been running it - I don't think the money will fix things.

I would suggest that may you could do a small loan against it to make paying your debts cheaper, but get the business making money on its own - afterall, that needs to happen anyway or the money would just be sunk into a hole and you'd end up with nothing.

Andy

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Andyhenry

15 years ago

No worries,

It did seem weird

Seriously though - I would do almost anything NOT to touch your 401k unless you see no other choice.

Roth IRAs are great too.

If you've got money in good places like that I'd leave it there if at all possible.

Andy

Originally Posted by Michael Mayo

Hi Andy,

My businesses are doing fine.
I never said that my business wasn't making money???

I was just bouncing ideals around and wanted to get other peoples
thoughts on the matter. Maybe I should have worded my OP a little better.

I don't need to pull the money out. The debts I spoke of in my OP are
actually my 23yr old daughters medical bills. Because of medical reasons,
she hasn't been able to work for more than a year. Presently, I'm
maintaining two households.

Some times you have to look at all your assets and re-evaluate their
performance. You have to ask yourself if they are performing well enough
and still on track for you to reach your goals. If not, then some thing
should be done by someone and in this case that someone is me.

I know many panicked when the market dropped and rushed to get their
money out of investments. That is not what I doing. I'm thinking that with
the money I could actually earn a better return over time by investing it in
my business.

Have a Great Day!
Michael

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Floyd Fisher

15 years ago

Originally Posted by Michael Mayo

Hi Andy,

My businesses are doing fine.
I never said that my business wasn't making money???

I was just bouncing ideals around and wanted to get other peoples
thoughts on the matter. Maybe I should have worded my OP a little better.

I don't need to pull the money out. The debts I spoke of in my OP are
actually my 23yr old daughters medical bills. Because of medical reasons,
she hasn't been able to work for more than a year. Presently, I'm
maintaining two households.

Some times you have to look at all your assets and re-evaluate their
performance. You have to ask yourself if they are performing well enough
and still on track for you to reach your goals. If not, then some thing
should be done by someone and in this case that someone is me.

I know many panicked when the market dropped and rushed to get their
money out of investments. That is not what I doing. I'm thinking that with
the money I could actually earn a better return over time by investing it in
my business.

Have a Great Day!
Michael

Mike:

Thanks for clearing that up for me.

Here's the deal: You might actually be able to withdraw that money sans penalty if and only if you're paying off medical bills.

Talk to your tax advisor on how to do this, and let your daughter know what you're doing too.

Thanks

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Tsnyder

15 years ago

Originally Posted by Michael Mayo

Hi Andy,

My businesses are doing fine.
I never said that my business wasn't making money???

I was just bouncing ideals around and wanted to get other peoples
thoughts on the matter. Maybe I should have worded my OP a little better.

I don't need to pull the money out. The debts I spoke of in my OP are
actually my 23yr old daughters medical bills. Because of medical reasons,
she hasn't been able to work for more than a year. Presently, I'm
maintaining two households.

Some times you have to look at all your assets and re-evaluate their
performance. You have to ask yourself if they are performing well enough
and still on track for you to reach your goals. If not, then some thing
should be done by someone and in this case that someone is me.

I know many panicked when the market dropped and rushed to get their
money out of investments. That is not what I doing. I'm thinking that with
the money I could actually earn a better return over time by investing it in
my business.

Have a Great Day!
Michael

Work the pencil hard... you'll have to earn a heck of a return
to overcome the taxes and penalties on the withdrawal PLUS the
taxes you earn on the additional profits you hope to generate.

It can certainly be done but you must have a solid plan and flawless execution.

Tsnyder

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derekwong28

15 years ago

I don't know anything about 401K but if you are worried about a double dip recession or a Japanese-style lost decade scenerio, I wonder if you could just change the composition of your 401k so as to increase the proportion of defensive stocks and other safer investments?

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bobsstuff

15 years ago

I'm 66 and my advice is DO NOT cash it in or even borrow against it. People living only on Social Security have it rough. People who think they have plenty of time to replenish savings often delude themselves.

One of the strategies of making money is saving money. A prime saving strategy is to NEVER touch money put aside. NEVER! It is there for only the most important purposes. It is not to "try" to make money in a business. Save it! Keep it saved!

If you take out the money, you will "deserve" dinner out, a new laptop etc etc. You will piddle away a lot of it if you are like most people.

When you take money out of interest earning savings, you lose the magic of compound interest. Compound interest does not do its real magic until lat in the term. It is like double 1 penny for 30 days, in the early days it does not amount to much, but the close you get to the end of the 30 days, the doubling is astounding. Same goes for lifetime savings. The amount is small to start but regular saving and compound interest can make you a millionaire when you retire.

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MizzCindy

15 years ago

Honestly, I'd say don't do it. If you absolutely decide you must, then take a loan against your 401K instead. But even that comes with risk.

If you lose your job for any reason, you'll be expected to pay back the loan in full immediately. That could cause you some serious grief, so keep that in mind, too.

Good luck with figuring out what to do!
Cindy

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MicahF7

15 years ago

First off you need to know exactly how much you will pay in taxes so you can make a relevant decision.

Then you need to take a hard, honest look at your offline business... If you are not making any money right know and you offline business is losing money ( that's what it sounds like if you are needing other money just to stay afloat) then what difference will this money from your 401k make exept to prolong the problem, unless you know exactly what to do with the money to make your offline business profitable.

If you can not make your offline business profitable with that money then you would probably be better off to keep your 401k for the future.

Micah Rush

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rbecgolf

15 years ago

Do not cash in that 401K. GO take a look at Dave Ramsey's get out of debt approach.

Trust me you will regret it if you cash it in now.

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Michael Mayo 15 years ago

Warriors,

I don't need the money from my 401K I was just asking your opinions
about it.

At the same time, I don't want to see it keep decreasing in value as it has
done for the past couple of years. Heck I've already lost more than I have
remaining in the account.

I was just thinking about it. I was figuring that if I had the money I could
get a better return on my investment by using it to continue building my
present businesses.

So I'll say it again,
I am not hurting for money and I don't need the 401K
money at this time. I would just like to see it work
harder for me instead of watching it melt away.

Hey, I'm not getting any younger!

Thanks for all your replies,
Have a Great Day!
Michael

PS. Sorry for shouting!
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seasoned

15 years ago

Michael,

The IRS basically WORKS to rip people off! Do you THINK they would let you have a 401K if you could use it? If you can get a loan against it, do THAT! If you can QUICKLY turn the money around, ok. I think you have like 30-60 days to put it back. Otherwise, HANDS OFF!!!!! The IRS will want you to pay them EVERY penny of tax on that money, at TODAYS rates, AND a "healthy" penalty!

Of course, see a KNOWLEDGABLE advisor BEFORE taking anyones advice(outside of just leaving it alone). But make sure they are knowledgable. That means you CAN'T call the IRS, since they THEMSELVES said LITERALLY that they can't be trusted. YOU are responsible for any actions made on their advice, right or wrong!

It is only about $60K anyway. If I needed that much, I would use my credit cards as a last resort. EVEN a HELOC! BTW a HELOC costs less BEFORE the tax deduction. AFTER, it is even less than THAT!

Steve

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smothersb

15 years ago

I cashed one in several years ago when I left one company and joined another. Man... what a tax nightmare. Great way to trigger an audit as well (learned this the hard way!) make sure if you decide to do it that you seek advice and assistance from a good tax attorney and you can probably avoid some of the crap that I dealt with.

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Josh Anderson

15 years ago

Originally Posted by Michael Mayo

Hell, I know Dave Ramsey would agree with me!

Actually I doubt it.

Dave would probably bring up the penalties you will pay in the form of a % and ask you if you would borrow money at 40% to pay off loans at 18% or something similar.

I hear him say something very similar to that in almost every show to people asking him the exact thing you are asking.

However, I'm not Dave Ramsey and I am with ya on this one...

The returns on investment online can be huge if you invest in development of your own products and services and if you have a track record and know how to make it work.

I also think that being debt free in this environment is pretty desirable.

Maybe you should call Dave's show first ;-)

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Rod Cortez

15 years ago

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! :confused:

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

Hell, I know Dave Ramsey would agree with me! :p

Thanks for the replies,
Have a Great Day!
Michael

Coming from a financial planning background, I've always been a huge advocate that your 401k is for retirement or life and death emergencies only. If you could find a creative or less expensive way to increase your overall profits I would focus on trying to go that route. Allow your 401k compounding to do its work. Sure, you could always find someone to agree with you, but I don't think it's a good idea. If you were my client I would take a look at your overall situation, your investments, time horizon to retirement, etc., but I'd probably still advise you not to touch your 401k.

RoD

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Vijay M

15 years ago

I don't really know much about %ages and finances. But that is exactly what I did.

I borrowed 15k from my 401k at 6.8% interest and cleared up my credit cards which were charging interest from 11% to 24%.

via auto deductions, I have almost paid back 5k.

If I stay at the current job, I should be able to pay off in another couple of years.

It looks good to me. The only issue might be if I get a great offer and have to jump companies.

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seasoned

15 years ago

Originally Posted by Vijay M

I don't really know much about %ages and finances. But that is exactly what I did.

I borrowed 15k from my 401k at 6.8% interest and cleared up my credit cards which were charging interest from 11% to 24%.

via auto deductions, I have almost paid back 5k.

If I stay at the current job, I should be able to pay off in another couple of years.

It looks good to me. The only issue might be if I get a great offer and have to jump companies.

You did NOT "cash a 401k", you borrowed AGAINST IT! The difference is HUGE! You paid 6.8% OVER TIME. CASHING typically costs about 40% UP FRONT!

Steve

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zapseo

15 years ago

if you want your 401K to work harder -- roll it over to a self-directed IRA.

Unlike the common opinion here, it is not true that all institutions automatically withhold taxes (with or without the 10% penalty) from any distribution that you take.

But if you are looking for flexibility in your 401K investments -- switch out of your 401K and into a self-directed IRA (oops, I'm sounding like a broken record.)

Research self-directed IRAs -- you don't hear about them as much because the financial institutions make more money by having you put your money in other-directed retirement accounts.

Self-directed IRAs can vary widely in capabilities and in what you can put into them. My late father had a loan to a restaurant in his -- but I wouldn't necessarily go to that extreme.

You might drop a line to "Coach Cheese" on this forum (Sarah Hurty) for more suggestions.

Live JoyFully!

Judy Kettenhofen, Copywriter & Marketer's Geek

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seasoned

15 years ago

Originally Posted by zapseo

if you want your 401K to work harder -- roll it over to a self-directed IRA.

Unlike the common opinion here, it is not true that all institutions automatically withhold taxes (with or without the 10% penalty) from any distribution that you take.

Did ANYONE say that!?!?!? I certainly didn't. It is ILLEGAL for the institutions to automatically withhold it. They don't know how much to withhold, don't want to be bothered, and I BELIEVE you have the option to do it MANUALLY! With some, you can ONLY do it that way, so withholding automatically would be THEFT.

The thing is that the IRS allows you to put money in a 401K BEFORE taxes. If you keep it out too long, they REQUIRE you to pay the tax you WOULD have paid, AND a penalty! It isn't "common opinion", it is LAW.

As for rolling it over into an IRA, talk to a knowledgable advisor first. ALSO, I doubt you can roll it into a roth IRA, since that is generally after tax.

Steve

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myob 15 years ago

Do you have a financial/business plan on how to spend the money? It doesn't sound like you really do, and you could end up losing your retirement. You should explore and exhaust all other sources of financing before touching your 401k. You may want to check out sba.gov, or SCORE. These are free and have resources to help you. But leave your 401k alone, and keep on contributing to it, especially if your company matches it.
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zapseo

15 years ago

Originally Posted by seasoned

Did ANYONE say that!?!?!? I certainly didn't. It is ILLEGAL for the institutions to automatically withhold it. They don't know how much to withhold, don't want to be bothered, and I BELIEVE you have the option to do it MANUALLY! With some, you can ONLY do it that way, so withholding automatically would be THEFT.

The thing is that the IRS allows you to put money in a 401K BEFORE taxes. If you keep it out too long, they REQUIRE you to pay the tax you WOULD have paid, AND a penalty! It isn't "common opinion", it is LAW.

As for rolling it over into an IRA, talk to a knowledgable advisor first. ALSO, I doubt you can roll it into a roth IRA, since that is generally after tax.

Steve

Steve,

The comments were not directed toward you, and your comments in this post (seemingly directed to me?) are not required. I'm not quite sure why you are so excited about the topic, but all I was commenting on was whether institutions would automatically withhold. I believe there ARE situations where they will. In fact, I clearly remember that 20% would be withheld under certain circumstances that I could have exposed myself to earlier this year -- which clearly affected how I handled things!

Oh well, I really don't enjoy discussing this, so I'm going to beg off.

Live JoyFully!

Judy

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James Pateman 15 years ago

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.

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James Pateman
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eidoan

15 years ago

Have you considered just borrowing from the 401k? You can probably take a loan from it and then you won't lose it, you'll get to use the money, and the interest you pay when paying back the loan goes into your 401k account.

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rontoski

15 years ago

Hey Michael, I doubt Dave would recommend your suggested action with that 401. Anyway, he is not the one who will have to live with your account once you take this action. A man must do what a man must do, but this may not be one of those "musts." You have already read the suggestions on borrowing--all valid options. One I like is taking charge of your 401 and self-directing it towards some basic funds that are now producing. Some are jumping one-to-three thousand dollars in value every two to three days. I am guessing you can actually self-direct. I would go out and look up the value and results for each fund in your 401--there should be a goodly number. Compare how each is doing and how each has done over the last 90 days. You can usually do this through Yahoo Finance. You should pick up a trail on several funds in your 401 that are doing nicely--better than nicely. I have recently added back over $27,000 to my 401 and it was down to about what you say your 401 is today. First, I moved everything to a bond fund until the funds stopped free-falling. Then I moved one-quarter each month until I sensed my direction was sound. Now, this week, I have transferred the full 100 % of what was in bonds to three funds. One is more agressive than the other two, but all three are advancing. You want to protect your base which before I was in danger of seeing the entire fund destroyed or seriously challenged. All of this I have experienced in the last four months. It grew over $2000 this week.

This type action may not remedy your immediate concerns about ready cash, but it will stroke your feelings about your fund growing and providing even more assets to use in the near future. And you are earning money and that's just as good as cash. Just don't cash it out in haste. Talk to your CPA (one that is accustomed to advising you on wealth building) and get some sound, financial advice. He most likely will not charge for your first meeting where you can get the general direction he will most likely lead. Your illustrious president is attempting to make it possible for your to save even more of your money in this fund--remains to be seen. But he might. If so, avail yourself of this. If you just absolutely have to tap your fund--get that CPA to show you the smartest way to do it and still meeting your goals. After all--this is your money and the money of your family. When you cash it--a big chunk will go to the Prez and his team of whiz-kids that are bent on draining our coffers dry. Hope this doesn't offend any of you sensitive souls. I have tried to give the Prez. the benefit of my doubts, but I must tell you, our money is not as safe as it once seemed to be. Good luck in finding a path that meets your needs. We shall all, most likely, be pulling for you.

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Lance K

15 years ago

People, from what I gather, Michael is thinking in terms of time value of money.

Taxes and penalties be damned. He's trying to decide if he could take what's left after taxes and penalties right now, put it to use, and end up with more in X number of years than if he left it alone in the 401(k).

At least that's how I understand his question. Especially since I'm pretty sure that anyone who has accumulated that amount of cash in a 401(k) fully understands the taxes & penalties associated with early withdrawls.

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sbp8610 15 years ago

I took the Dave Ramsey course and I would have to say that he would be completely against this, unless the comment you made was sarcasm and I just didn't catch it.

Why not call up Dave Ramsey on his tv show and ask him about it, he's live like 5 nights a week and does nothing but takes phone calls.

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- TimCastleman 15 years ago
  
  Dave wouldn't tell you to cash out your 401k. He would tell you to live on less than you make, snowball your debt and pay off from smallest to largest. Turn your 401k into a money market account (if you can) and let it set there. That is what I did with mine.
  
  Don't do it.
  
  Tim
  
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seasoned

15 years ago

Originally Posted by Lance K

People, from what I gather, Michael is thinking in terms of time value of money.

Taxes and penalties be damned. He's trying to decide if he could take what's left after taxes and penalties right now, put it to use, and end up with more in X number of years than if he left it alone in the 401(k).

At least that's how I understand his question. Especially since I'm pretty sure that anyone who has accumulated that amount of cash in a 401(k) fully understands the taxes & penalties associated with early withdrawls.

Y0u have three items that are EXACTLY the same in EVERY WAY!!!!!

1. This item costs $4000
2. This item costs $2880
3. This item costs $2640
4. This item costs NOTHING, but you may have to wait 6 months to get it.

So why are you saying #1 is better? I am saying go with 2,3, or 4. BTW

1 is cash out. EXPENSIVE!
2 is borrow against. After say 5 years it is more expensive than #1, but less hassle and cheaper before about 5 years.
3. is borrow from other sources. Same as #2, but about 2 years instead of 5.
4. is save.

Steve

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Lance K

15 years ago

Steve, I wasn't arguing in favor of it.

I was just explaining what I understood Michaels question to be.

My financial planning days may be behind me, but I still wouldn't recommend taking early withdrawls from a retirement account unless it was an absolute last resort.

Originally Posted by seasoned

Y0u have three items that are EXACTLY the same in EVERY WAY!!!!!

1. This item costs $4000
2. This item costs $2880
3. This item costs $2640
4. This item costs NOTHING, but you may have to wait 6 months to get it.

So why are you saying #1 is better? I am saying go with 2,3, or 4. BTW

1 is cash out. EXPENSIVE!
2 is borrow against. After say 5 years it is more expensive than #1, but less hassle and cheaper before about 5 years.
3. is borrow from other sources. Same as #2, but about 2 years instead of 5.
4. is save.

Steve

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vagabondette

15 years ago

The financial planner in me is screaming but I'll leave it at this: This is a REALLY bad idea for many reasons.

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bill05

15 years ago

Do a Google on "Ed Slott" ...

Possibly the definitive source on IRA, ROTH, 401k, 403b, TSA, 457 and the like...

Bill

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vagabondette

15 years ago

in quickly scanning the thread I have a few comments:

1 - be VERY VERY careful with self directed IRAs. They have extremely tight regulations and if you do one small thing wrong you invalidate your entire account.

2 - the 20% withholding is not mandatory but is strongly recommended by most providers because, as the recent financial crisis has shown, the average American is complete crap at managing their finances and can't really be trusted to put the $@40k into a savings account for next year's taxes.

3 - you can roll directly to a Roth however, you will still have to pay taxes and, if you removed the money within 5 years of the conversion you'll still have to pay the 10% penalty.

4 - if you just need a quick cash infusion to tide you over on something one option may be to just take out a smaller chunk and replace as much of it as you can within 60 days. If you replace it within 60 days you pay no taxes or penalties though anything you don't replace will be penalized.

5 - Dave Ramsey would never recommend taking this money out.

6 - You've already lost half and taking the money out will do nothing but lock in that loss and increase it with taxes and penalties.

7 - this could have further reaching effects on your tax situation so at the very least talk to an experience estate planner/tax attorney before you make any decisions.

8 - for those recommending a loan - unless he's still an active member of the plan it is highly unlikely that he will be able to take a loan. There are a few plans that allow this but it's rare because the plan admin no longer has the control to structure/manage the loan and repayment. In fact, typically if you have a loan while you're an active employee and you terminate your employment your loan must be repaid within 30 days or it's considered an early distribution and taxed/penalized accordingly.

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Lance K 15 years ago

I'm starting to feel like the only Warrior who hasn't heard of Dave Ramsey.

But that could be a good thing I suppose.
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- vagabondette 15 years ago
  
  Originally Posted by Lance K
  
  I'm starting to feel like the only Warrior who hasn't heard of Dave Ramsey.
  
  But that could be a good thing I suppose.
  
  He's just another personal finance guru. Nice enough guy IRL but I can't listen to/read his stuff because it's a bit too "God is Great" for me. Plus I disagree with some of the stuff he recommends. I personally prefer David Bach as do most of the financial pros I know.
  
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TheRichLife

15 years ago

Why are you asking this question here? Is it going to make you feel better if you receive affirmation? Is it going to change your mind if the response is negative?

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john2k

15 years ago

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

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seasoned

15 years ago

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

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MichaelHiles

15 years ago

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.

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Michael Mayo

12 years ago

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! :confused:

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

Hell, I know Dave Ramsey would agree with me! :p

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

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Sojourn

12 years ago

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!

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Alan Petersen 12 years ago

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.
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