401K

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madamez's picture
madamez
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Joined: Mar 30 2011
Posts: 4
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?

Poet's picture
Poet
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Joined: Jan 21 2009
Posts: 1891
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:
http://www.peakprosperity.com/blog/prepping-shoestring-how-prepare-when-...

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

crazyhorse's picture
crazyhorse
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Joined: Nov 16 2008
Posts: 56
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.

 

RNcarl's picture
RNcarl
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Posts: 382
madamez wrote: I'm sure this
madamez wrote:

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?

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!

sjdavis's picture
sjdavis
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Joined: Sep 21 2008
Posts: 78
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.

Poet's picture
Poet
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Joined: Jan 21 2009
Posts: 1891
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

RNcarl wrote:

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!

SailAway's picture
SailAway
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Joined: Aug 11 2010
Posts: 404
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...

 

 

nickbert's picture
nickbert
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Joined: Jan 14 2009
Posts: 1207
state income tax 401k penalty? yikes
Poet wrote:

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

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

madamez's picture
madamez
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Joined: Mar 30 2011
Posts: 4
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?

madamez's picture
madamez
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Joined: Mar 30 2011
Posts: 4
corporate takeover....
nickbert wrote:

  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

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.....

RNcarl's picture
RNcarl
Status: Gold Member (Offline)
Joined: May 13 2008
Posts: 382
Debt slavery or "save" 10% its up to you!
nickbert wrote:
Poet wrote:

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

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

I took my state retirement out last year. It wasn't a lot and I thought it was better to have "some" of the money rather than "none" of it.

There was a required 6% withheld, no it was 8% if I remember right for state income tax. All I had to withhold for the Feds was 20% as I remember it but that would have included the 10% penalty. So I said, "nope, withhold 30% out for the feds, because I figured, out of the 20% would come the 10% penalty... Alas, I am NOT in a 10% federal tax bracket! So 30% it was! Also, If I remember correctly, some if not all of the withdrawal was subject to 7.5% FICA (paid at the end of the year)....

So, lets see, 30+8+7.5= 45.5%

So, I "lost" 45%.

BUT! The nominal taxes would have been due at the time I could remove the money anyway. Also, the FICA would have to be paid as well. So, net I did loose 10%. Maybe a tad more assuming that at retirement I would be in a lower "bracket" - however, by then, who knows what the bracket would be.

You really only loose the 10% plus any future "potential" earnings. For me, since I hadn't "vested" to draw a state retirement, the money would only earn 2% per year for like 5 years. It had stopped earning that a few years ago. So, for me, I really only lost 10% of the amount. Now, to extinguish some of my debt, I will actually be ahead this year when you factor in the interest that I will NOT pay by no longer carrying that debt!

As I said, each person has to do their OWN math. Chris says "trust yourself".

Lastly, and I feel that what I am about to say is so important, that it needs to be mentioned here. IF that debt you extinguish is from credit cards, you MUST!!! Close those accounts!!!! The lure of using them for an "emergency" is just too great! Immediately cut up the cards. You don't need them. Really.

Best of Luck!

C.

RNcarl's picture
RNcarl
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Posts: 382
Got-cha!!
madamez wrote:

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?

Ahhh....

I forgot about that "got-cha". Yes, some accounts do not let you do withdrawals unless you leave the company or die! - Or retire (yeah right) It must be the way the company structures the account with the brokerage company who holds the money.I am sure it is to do two things, one, maximize the profit of the broker and two, maximize the tax savings of the company.

Again, see, each person has their own details to work out.

As for switching it to an IRA I doubt they will allow that. See, the brokerage house is making a profit from your money so they don't want you running amok managing your own money. Plus, the (I) in IRA is for Individual.

Good Luck!

C.

Poet's picture
Poet
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1891
Can't Just Roll From 401(k) To IRA Without Leaving...
madamez wrote:

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?

I agree with RNcarl, yes some companies don't let you take money out as a withdrawal even in hardship conditions. They only allow loans.

Also, you can't just switch the 401(k) to an IRA unless you left your company of employment and then did an IRA rollover (gotta carefully plan that).

If your company provides a worthy matching contribution and you're vested or likely to be vested soon, you might consider lowering your contribution to just enough to get the full match. You can reduce your 401(k) contribution, then use the extra money you would have put into the 401(k) to instead turn it towards a personal IRA instead or towards paying bills or buying supplies/preps.

If you're going the investment route, I suggest a Roth IRA even though it's funded with money you first pay taxes on. Some companies like Scottrade, can be opened with just $500, and charge no fees except if you buy stocks or certain mutual funds not on their qualified list of no-fee funds.

A Roth IRA is beyond flexible. You can always take out the qualified contributions you put into a Roth IRA (for an emergency, a vacation, an emergency vacation, whatever) tax free. (Scottrade says they can get a check sent out in the mail within 1 to 3 business days). The earnings on those contributions can be withdrawn tax free starting at age 59.5 or even for certain qualified reasons (like $10,000 to buy a house). Also importantly, 401(k)s, IRAs, and Roth IRAs are safe to a certain extent (depends on the state you live in) from creditors even in bankruptcy. (And If your kid has a job, they can put money into a Roth IRA - it's not considered savings when colleges determine financial aid.) Also, for a regular fee, there are some companies that offer custodial accounts that allow you to invest in precious metals in your traditional (pre-tax) IRA or Roth IRA.

Please Note: I am NOT a tax or financial professional. You should additionally seek the services of a tax or financial professional for your specific situation. If there's someone else here more qualified, please speak up. Thanks!

Poet

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Leaving your company

Poet said, "Also, you can't just switch the 401(k) to an IRA unless you left your company of employment and then did an IRA rollover (gotta carefully plan that)."

This is what I wrestle with.... I have a job that I love, and after 28 years as a corp. engineer, I have significant savings tied up between my 401K and my lump sum pension savings... both of which I would love to have in a self-directed IRA.  

If there really is going to be a dollar destroying event... then I should really quit, even if it means taking a cut in pay... and do some combination of rolling over (and into PHYS and PSLV) and paying of taxes and penalties in order to get control over this money and get it into forms that will survive into the next monetary system.  Confounding ....... .     

madamez's picture
madamez
Status: Member (Offline)
Joined: Mar 30 2011
Posts: 4
Confounding is right....
Jim Hannah wrote:

If there really is going to be a dollar destroying event... then I should really quit, even if it means taking a cut in pay... and do some combination of rolling over (and into PHYS and PSLV) and paying of taxes and penalties in order to get control over this money and get it into forms that will survive into the next monetary system.  Confounding ....... .     

Right, so hard to decide. I can't do anything but take a loan.  At the very least I need to get out of my SUV (keep it cuz it's paid for but get a hybrid) because oil prices will undoubtedly go up.  I could pay off my debt (save interest) and get a car with better gas mileage with that loan, save money and be paying myself interest instead of a bank.  But if sooner than later the economy crumbles and I can't pay the loan back..... 

Yeah, seeing as most people are in debt, and most people will lose their job when the economy collapses, I don't see how banks are thinkin they'll get their money back.  And how do we keep the real criminals in jail, let alone put all the people who will be defaulting on their debts in there?!  Makes me think Alex JOnes may be right; they will make us slaves! Yikes!  Spose most of us are already slaves to them, when you think about it......

herbertcraig06's picture
herbertcraig06
Status: Member (Offline)
Joined: Oct 27 2014
Posts: 1
It's true, you can do

It's true, you can do whatever you want... But I want you to know that, with all the not so great news going around nowadays, people who have 401(k) plans have some good news. Earnings on 401(k) plans have been sneaking up over the past year according to press releases from various outlets.

Resource for this article: http://personalmoneynetwork.com/moneyblog/2012/07/31/401k-loan-defaults/

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