Cashing out Roth 401k

[neguy11]

I will be getting laid off in a few months and am making plans for when that occurs. I fully understand that cashing out a 401k is the "worst" thing you can do. But all of my money goes to bills at this time and I have no savings, so it's something that I may need to consider.

I'm trying to figure out how much actualy cash I would get and approximately what taxes I would owe. I live in Florida (no state income tax) and am in the 15% tax bracket. I have a ROTH 401K with the following balances as of today:

ROTH 401k BALANCE
Contributions = $2250
Current Balance = $2311
Gain or Loss = $61 Gain

EMPLOYER MATCHING BALANCE
Contributions = $1852
Current Balance = $1911
Gain or Loss = $59 Gain

My understanding is that I will owe a 10% penalty on the $61 Gain, $59 Gain, and $1911 employer matching balance AND federal taxes on the $61 Gain, $59 Gain, and $1911 employer matching balance. I was also told they will withold 20% of the total cash payout.

Please let me know if this is true or not.

Additionally, assume I do decide to cash it out....should I keep contributing to it so that I can get the employer match? Even if I owe 25% taxes on the employer matching, the other 75% is "free" money so to speak.

[Broken Arrow]

Because it's a Roth, there are no income taxes to pay upon withdraw. However, you will have to pay early withdrawal penalty for any money beyond your original contribution.

The 20% withhold may have to do with the 401(k) itself. I'm not sure. Maybe someone else on here will know.

Also, have you considered taking out a loan instead of a complete withdraw? This is preferable if the interest rate on the loan will make it cost less than the hit in early withdraw penalty.

[kv968]

I'm pretty sure early Roth 401k withdraws are treated the same as early traditional 401k withdraws in that the company may have to withhold 20% of the total cash-out, which would be $844.40. Come tax time, you would only have to claim the gains and company match. The 10% penalty would be assessed on the gains and company match also. You could look into

As far as continuing contributions to get the match, I would first check with your employer to see if you can even do that while laid off. Usually after a hardship withdraw a company will freeze contributions for 6 months.

Good luck, I hope everything works out for you.

[sfalexi]

If you paid the MINIMUM on your bills for the next few months (till you get laid off), how much could you save? I think if you can, try to save as much as you can, and live as best you can off that (that means starting NOW to cut out expenses and luxuries) before cashing a 401k.

I think this might be better cause cashing out the 401k is DEFINITELY something you can do. Albeit something you might not want to do. So if you start to run low on those savings before you get another job, you can fall back on the 401k. If you get another job that you can live on BEFORE you absolutely HAVE to touch that 401k, you just saved yourself the penalties, and still are in good shape (paying the minimums).

Just something I was thinking about.....

Alexi

PS - If I were worried about getting laid off, personally I wouldn't contribute any more and even put THAT money into savings. It'll be able to pay for SOMETHING.

[bheem]

I would say, don't cash the retirement account unless you have to save your house from foreclosure or save yourself from bankruptcy. In this economy, getting laid of is not uncommon. They are certainly hard times. No question. But don't consider breaking the nest egg premature as the first option.

You are lucky since you have few months and you know it now. focus on getting some other job. If you don't find the dream career job, don't worry, stick to a stop gap job that can pay your bills and keep searching for the one you like.

Also, when you get laid off, I don't think you will be able to take loan from employer sponsored retirement account. Once you are laid of, the loan will be due in next 60 days or it will be considered as early withdrawal.

Put all your energy into job search and you will succeed. Good luck.

Bheem

[happygirl]

Since you know you will be getting laid off in a few months, I would stop making 401k contributions immediately and start putting that money into an emergency fund.

Have you read Dave Ramsey's TMMO book? While I don't necessarily agree with everything he recommends, I think his basic steps are very wise. He's been able to offer suggestions to get people out of really bad situations.

Good luck to you.

[Fern]

You say you need the roth ira money to pay bills. But what about unemployment benefits? Have you visited your state's DOL website to see what you'd gross each week?