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401K

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  • Thu, Mar 31, 2011 - 01:00am

    #1
    madamez

    madamez

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    401K

I’m sure this has been discussed before but don’t see it listed in the last 5 pages of threads….  I am seriously considering withdrawing from my 401K to buy some necessary stuff I know I’ll need to be prepared.  I figure it won’t be worth much after the collapse, but the goods it would buy now will be invaluable.  My plan only lets me take a loan of up to half my savings, to be repaid over 5-20yrs…..  So being a single mom i’m wondering; chances I’ll get my money out now, safely before the banks go under (and then at that point who is really gonna be bothered with enforcing me to pay back a loan to myself and will the government be bothered enforcing the tax penalty on me) VS. chances i lose my job (i’m a nurse) and the banks come after me to repay and I can’t pay.  

Anyone in the same position?

  • Thu, Mar 31, 2011 - 02:28am

    #2

    Poet

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    I Wouldn’t Do A 401(k) Loan

Madamez

You can do whatever you want.

However, if I were in your position, I would NOT be taking out a 401(k) loan. As you know, if you ever get laid off or fired or had to leave your job for whatever reason, the loan is repayable in FULL within 90 days. And if you were in a position where you couldn’t immediately repay the loan, it’s considered an unqualified withdrawal, which means you have to pay taxes on it at your marginal tax rate, as well as the 10% additional penalty on top of the taxes. If you can’t pay, it’s not a bank, but Uncle Sam who comes after you.

Now, if you wanted to actually take a distribution and pay taxes on it, I guess you could do that, instead of a loan. At least you know where that leaves you.

Of course, if you have the option within your 401(k), you can consider investing a small amount in individual stocks or in precious metals. Or, you can reduce your 401(k) contributions and instead fund a self-directed IRA or Roth IRA or use the money to buy what you need to prepare. It depends on how bad you think things will be, whether you think you’ll have to repay a loan at all, and in what kind of timeline.

The main problem of course, is that none of us know when the economic collapse will happen. It could be within two months It could take another 5 to 10 years. And who knows? Maybe the government won’t be able to enforce collections – or, in a collapse situation, the government could instead outsource it to private collectors who make personal visits. Isn’t that what a lot of politicians want to do these days? Privatize?

For prepping, I would start small with the basics of the “What Should I Do?” series, and slowly add to that. By example, I would start with a a two-to-three week supply to take care needs due to a natural disaster (hurricane, earthquake, blizzard, tornado, tsunami). For more long-term goals, I would set up a 6-month plan of what I can reasonably expect to save and purchase and prepare within 6 months to extend out supplies or preparations to a month or two, and a 1-year plan for what to do to extend out supplies and preparations to last for up to 4-6 months. Beyond that, it’s about continuing to add to what you have and making longer-term goals.

There’s a great article in that series called Prepping on a Shoestring:
https://www.peakprosperity.com/blog/prepping-shoestring-how-prepare-when-times-are-already-tight/49971

For what it’s worth, I’m the sole breadwinner of a family of four. Money is tight and we live in a one-bedroom apartment.

Poet

  • Thu, Mar 31, 2011 - 12:18pm

    #3
    crazyhorse

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    We pulled our money out of

We pulled our money out of our IRA’s back in early 2009 and took the 10% hit.  Was it the smartest thing to do?  Financially, probably not, but on a preparadness level it made sense to us…I know that we payed a decent amount that year in taxes…However we used part of that money to purchase a PV solar off grid system, which gave us a 30% credit on its purchase.

If I had to do it all over again, I’d probably do the same thing.  I’ve been dissillusioned by the programs like 401k and IRA’s.  I want the freedom to move my money as I see fit and once you’ve committed to those investment vehicles, you’ve locked yourself in to the government’s rules (which they can change as they go along).  

We decided to “opt out” of the traditional financial system…probably to our detrimenet .  But on the other hand, we are liberated from it….and have no worries.

Please do not take my experience as financial advise…there are financial advisors for that, and you need to talk to yours about what your options are…I’m just relaying how things worked for us.

 

  • Thu, Mar 31, 2011 - 01:50pm

    #4

    RNcarl

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    madamez wrote:I’m sure this

[quote=madamez]

I’m sure this has been discussed before but don’t see it listed in the last 5 pages of threads….  I am seriously considering withdrawing from my 401K to buy some necessary stuff I know I’ll need to be prepared.  I figure it won’t be worth much after the collapse, but the goods it would buy now will be invaluable.  My plan only lets me take a loan of up to half my savings, to be repaid over 5-20yrs…..  So being a single mom i’m wondering; chances I’ll get my money out now, safely before the banks go under (and then at that point who is really gonna be bothered with enforcing me to pay back a loan to myself and will the government be bothered enforcing the tax penalty on me) VS. chances i lose my job (i’m a nurse) and the banks come after me to repay and I can’t pay.  

Anyone in the same position?

[/quote]

I think the reason for that is what Poet pointed out. When you remove your money out of an account like that, you take almost a 50% hit in taxes. Most likely, that is why they only let you “borrow” up to 50% – That way, when you get laid off, the 50% left in the account will go to pay the taxes.

Normal folks like us don’t stand a chance against the “system”. The IRS WILL get their money.

Now, here is something to think about.

Do you have debt, consumer, car, or home mortgage? Except for the last, calculate what you are paying in interest on those accounts and I would be willing to bet that it is very near (on an annual basis) the hit you would take in taxes if you removed that money from the 401K. That hit only happens ONCE. The interest paid on those loans happen every year!

So, you will have to “run the numbers” for yourself to know which is better. My thought is this – IF you are taking the money out to pay off debt, then great! IF you are taking the money out to buy SPAM, bullets and a water filter – leaving yourself with other debt… Don’t do it!

Remember, the “average” person can’t fight the financial system. Some may say to keep the debt and pay it off later with highly inflated dollars which make the debt “look” smaller. I think that is a gamble I am not willing to take.

Good Luck!

  • Thu, Mar 31, 2011 - 02:36pm

    #5
    sjdavis

    sjdavis

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    No reason you have to take

No reason you have to take out half or all of your funds.  If you have debt to pay or things to buy, you can start with small amounts.  One thing to consider, your taxes will be your tax rate plus 10%.  That seems reasonable to me.  Consider that you’re likely to earn more money later and taxes are likely to rise over time.  It may end up being a wash.  So all you lose out on is the opportunity for capital gains.

  • Thu, Mar 31, 2011 - 03:31pm

    #6

    Poet

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    State Tax and Penalty On Withdrawal

RNcarl is right. I forgot to mention that some states not only tax, but ALSO add a penalty, so it’s not just federal tax and 10% penalty, it’s also state tax and state penalty. So a 50% tax is not unheard of.

Also, if you have debt with a higher interest rate than what you can reasonably expect out of a 401(k) investment’s “growth” (including factoring in any possibly-vested employer match and taxes you’ll pay either now if withdrawn now, or later in retirement), you may want to pay off the debt first before furthering any additional savings.

Poet

[quote=RNcarl]

I think the reason for that is what Poet pointed out. When you remove your money out of an account like that, you take almost a 50% hit in taxes. Most likely, that is why they only let you “borrow” up to 50% – That way, when you get laid off, the 50% left in the account will go to pay the taxes.

Normal folks like us don’t stand a chance against the “system”. The IRS WILL get their money.

Now, here is something to think about.

Do you have debt, consumer, car, or home mortgage? Except for the last, calculate what you are paying in interest on those accounts and I would be willing to bet that it is very near (on an annual basis) the hit you would take in taxes if you removed that money from the 401K. That hit only happens ONCE. The interest paid on those loans happen every year!

So, you will have to “run the numbers” for yourself to know which is better. My thought is this – IF you are taking the money out to pay off debt, then great! IF you are taking the money out to buy SPAM, bullets and a water filter – leaving yourself with other debt… Don’t do it!

Remember, the “average” person can’t fight the financial system. Some may say to keep the debt and pay it off later with highly inflated dollars which make the debt “look” smaller. I think that is a gamble I am not willing to take.

Good Luck!

[/quote]

  • Thu, Mar 31, 2011 - 04:35pm

    #7

    SailAway

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    If you want to estimate how

If you want to estimate how much tax you would owe if you take a distribution, why don’t you just go to Turbo Tax online and plug-in the numbers? It’s free so long as you don’t file. I do that all the time to estimate my taxes and each time I have a “what if” question.

http://turbotax.intuit.com/

10% penality today is not necesseraly the end of the world. Given the level of dept in the country, it’s highly likely that the tax rates will be higher in the future. And if you invest the distribution in PM, 10% would be in the noise of the volatility of this market…

 

 

  • Thu, Mar 31, 2011 - 04:58pm

    #8

    nickbert

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    state income tax 401k penalty? yikes

[quote=Poet]

RNcarl is right. I forgot to mention that some states not only tax, but ALSO add a penalty, so it’s not just federal tax and 10% penalty, it’s also state tax and state penalty. So a 50% tax is not unheard of.

Also, if you have debt with a higher interest rate than what you can reasonably expect out of a 401(k) investment’s “growth” (including factoring in any possibly-vested employer match and taxes you’ll pay either now if withdrawn now, or later in retirement), you may want to pay off the debt first before furthering any additional savings.

Poet

[/quote]

Ah, so THAT is how you arrived at the near 50% figure…. now it makes sense.  It’s easy for me to forget about state income tax (we don’t have one in Alaska… yet).  And I have never heard of a state income tax penalty for early withdrawal.  What a load of *#@* that is.  How many states do that?

I myself will be cashing out my 401k in May to pay off the rest of my student loan debt.  In reference to your example, the interest rate on my consolidated loan is very low so most conventional financial types would probably say I’m doing the (even more) stupid thing.  From my perspective, I think it’s just as likely my 401k will lose value in real terms, maybe even in nominal terms too.  And considering this student loan debt (the only debt I have) can never be discharged or forgiven if for some reason I’m unable to keep paying, that low interest rate doesn’t give me much comfort.  IMO it’s just as likely we’d see some 21st century version of debt servitude as we would some large-scale debt forgiveness initiative, depending on how much power the banks and financial institutions manage to retain.

– Nickbert

  • Thu, Mar 31, 2011 - 05:11pm

    #9
    madamez

    madamez

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    thanks

Lot of good information, thank you.  I didn’t think about paying off debt with the money, I do not have much debt so that would be doable and a good idea.

From what I gathered from the human resources lady, the only way i’m able to straight out withdrawl the money (without taking out the loan) would be if I died or celebrate my 59th b-day.  I was willing to pay taxes and penalty i’m not trying to get around that….  For now I put a stop on what I was contributing and changed my W-4, taking a couple more exemptions (instead of treating my tax return as a savings account I can’t touch which is what I’ve been doing) so that should free up some more funds on a weekly basis.

  Someone suggested switching my 401K over to an IRA…? Anyone know how that works?

  • Thu, Mar 31, 2011 - 05:17pm

    #10
    madamez

    madamez

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    corporate takeover….

[quote=nickbert]

  IMO it’s just as likely we’d see some 21st century version of debt servitude as we would some large-scale debt forgiveness initiative, depending on how much power the banks and financial institutions manage to retain.

– Nickbert

[/quote]

Yeah this is my worry.  I watched a couple of those Alex Jones documentaries and gotta say I’m a little freaked out that the corporations may end up controlling the goverment (openly, we all know they are secretly controlling it now) once this all goes down….. worst case scenario I don’t want to spend too much time thinking about…..

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