Tax on Early Withdrawal on 401K

[ua_guy]

Put it in perspective.

If you cash out your 401k and withold taxes and pay penalties, let's assume you only end up with 80% of that $21,000 account balance, which is $16,800.

If you put that on a credit card at 8.9% and pay it off over 2 years, you need to make a monthly payment of about $766, and the total cost of borrowing the money will be right about $1600.

That's still almost $2600 cheaper than liquidating your 401k, using one of the most expensive financing options at your disposal (provided you can get a credit card with a $15k-$18k limit and you also have to figure in opportunity costs, which weigh heavily against cashing out your retirement. Figure on average your 401k earns 6-8% annually, so the cost of financing even at a high rate like 8.9% is mitigated by keeping 401k monies in the retirement account.

If the SHTF, it's also easier to walk away from a credit card, your retirement accounts are protected in bankrupcy, however you cannot walk away from a student loan.

[ua_guy]

I didn't see anyone suggesting to borrow specifically against the 401k (as a 401k loan)? To me, that is the same difference as taking a distribution. If you can't pay it back, then it is a distribution, and you are back to square one. You are correct in how it works.

I think the rules here are plan-specific, and often require a defined hardship, don't they? I know the rules vary between different types of retirement account and I believe some rules are plan-specific. It's a potential option, though.

[MonkeyMama]

I think the rules here are plan-specific, and often require a defined hardship, don't they? I know the rules vary between different types of retirement account and I believe some rules are plan-specific. It's a potential option, though.

Rules are plan specific, yes.

A "Defined hardship" is more of an over-reaching IRS rule (for all plans). But, it's kind of a joke. "Paying for college" is one of those hardship reasons. I have no doubt that OP Could easily take a hardship withdrawal. I've rarely seen an in-service withdrawal that was actually taken out for a true financial hardship.

The hardship rules and restrictions are only for while you are employed 401k provider. The OP already quit, so they can't take a loan and they can easily take a distribution for any reason. (The part where they already quit went over my head in last reply. I guess the whole loan thing is really moot. It was moot anyway, but I didn't pick up on that in my last reply. If you take a loan and quit the next day, you have to pay it back).

[MonkeyMama]

I believe when one takes money out of a 401K prior to their reaching retirement/distribution age, it is considered a loan and has to be paid back. Taking it after the correct age it is considered a distribution and doesn't need paid back. I get a small pension via my ex-husband and when doing taxes it is called a distribution. The difference is whether it will need to be paid back or not. But like I said it has been awhile since I went through that with someone, but he had to pay it back, with interest I might add that is paid into his account! The government does what it can to keep people from killing their retirement dreams with all the rules.

You can do a loan or a distribution. These are two separate options, available to most at any age. As Ua_Guy points out, rules can get really plan specific. Not every plan has to offer a withdrawal option. The government incentive is to penalize you for taking early distributions. Once you leave your job, it's pretty simple to take an early distribution (no rules but pay the taxes and penalties). In fact, you can't take a 401k loan if you are no longer with the 401k employer.

[Gailete]

The original poster said she wasn't working full time now. I took that to mean that she was still part time at the job which would create problems with her 401K. All in all though it is a bad idea. Due to circumstances of life more than once I had to clear out my retirement accounts and I am paying for that now. Wasn't something that I wanted to do but it came on the hills of a larger bad decision I had made. If I hadn't made that decisions, I probably would have at least $100K in retirement funding plus substantial savings now instead of around $8K in retirement savings

[Petunia 100]

The original poster said she wasn't working full time now. I took that to mean that she was still part time at the job which would create problems with her 401K. All in all though it is a bad idea. Due to circumstances of life more than once I had to clear out my retirement accounts and I am paying for that now. Wasn't something that I wanted to do but it came on the hills of a larger bad decision I had made. If I hadn't made that decisions, I probably would have at least $100K in retirement funding plus substantial savings now instead of around $8K in retirement savings

Gailete, I wish you were still blogging. I know you and your dh have a limited income and must be quite frugal. I would love to read more about how you make ends meet day to day.

[emanon1501]

I'm still at the starting gate trying to figure out why a couple (with no kids?) making $110,000 a year needs to be borrowing from a 401K to make ends meet? Even if you aren't working at all, your hubby is pulling in a good salary. Much higher than the average salary these days.

I was thinking of the same thing.

[Gailete]

Gailete, I wish you were still blogging. I know you and your dh have a limited income and must be quite frugal. I would love to read more about how you make ends meet day to day.

Thanks Perunia! I stay so busy and currently have to share computer time (with satellite speed) with hubby so I don't get as much time to do what I like and that includes blogging. After some research yesterday we have come to the realization that instead of relying on selling venues for our sewing pattern store, I need to set up our own website so that will take much more time! Google has made many changes in the past couple of years that is affecting on line sellers in a not good way on top of telling us how we need to do our listings. I had been under the impression that Google was a search engine not a selling venue so as far as I'm concerned they have grown too big for their britches which means I have to work at another way to get their attention for what we sell.

One of the big things that we did to improve finances is him going back to piano tuning which really helped with ready cash this past year. When he used to do it the payment was so cheap as to hardly being worth his time. Currently he is the only tuner taking on new clients in our entire county including our nearest city as the other tuner is retiring which means he will then be the ONLY tuner! And prices for tunings have gone way up! So one of the biggest things to making ends meet is not expecting the same old thing will result in different results when it comes to making money!

[snafu]

OP: I wish I knew the magic words that would stop you from withdrawing funds from your retirement plan. Not only do you pay taxes and penalty but you lose the magic of compounding the sum already there that continues on and on, year after year from your tender age to your far off 60's - 2073 or whatever the legislation mandates in your future. You may add to your retirement fund in the future but you will not recapture lost compounding.