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Thread: 401K questions

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    Atomic Punk BREW CREW's Avatar
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    Default 401K questions

    I have a good chunk of money in a 401K plan from a previous employer. What I need advice on is what is the best way to take that money out of that account and where to put it to get better results. Also, I would like some of that money for my own use with the least amount of penalty.
    Any help/advice is greatly appreciated!


    p.s. I am trying to avoid taking the money out until after the first of the year so I do not have to take any penalty until tax time '09.

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    Good Enough Rocket's Avatar
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    Don't use any of it as there is a hefty 10% penalty.

    Best bet is to roll it into a Roth IRA.

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    Atomic Punk ZeoBandit's Avatar
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    Yeah, definitely don't take any out without bending over and getting ass-raped.
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    Atomic Punk
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    Quote Originally Posted by BREW CREW View Post
    I have a good chunk of money in a 401K plan from a previous employer. What I need advice on is what is the best way to take that money out of that account and where to put it to get better results. Also, I would like some of that money for my own use with the least amount of penalty.

    Any help/advice is greatly appreciated!

    p.s. I am trying to avoid taking the money out until after the first of the year so I do not have to take any penalty until tax time '09.
    Does your current If you are working, dmployer have a 401k program? You could then roll it into that one and borrow a little from yourself...
    "Watch what people are cynical about, and one can often discover what they lack.” -- Gen. George S. Patton

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    Atomic Punk onefootoutthedoor's Avatar
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    Quote Originally Posted by voivod View Post
    Does your current If you are working, dmployer have a 401k program? You could then roll it into that one and borrow a little from yourself...


    Exactly.
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    Quote Originally Posted by onefootoutthedoor View Post
    Exactly.
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    Romeo Delight
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    Taking money out can be tricky especially if you are under 59 and 1/2. I've been in the financial services industry for 12 years and work with great retirement planners all over the US. Email me and I can put you intouch with a rollover specialist. Good luck Travas

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    Quote Originally Posted by voivod View Post
    Does your current If you are working, dmployer have a 401k program? You could then roll it into that one and borrow a little from yourself...

    Most plans offer loans and you actually pay the interest back to yourslef.

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    Atomic Punk jimmy812's Avatar
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    Quote Originally Posted by voivod View Post
    Does your current If you are working, dmployer have a 401k program? You could then roll it into that one and borrow a little from yourself...
    I was going to say the same thing.....except I would have said "employer" and not "dmployer."
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    Romeo Delight jordacr's Avatar
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    Quote Originally Posted by voivod View Post
    Does your current If you are working, dmployer have a 401k program? You could then roll it into that one and borrow a little from yourself...
    While it is true that you pay yourself back with interest, it is still not a good idea. Loan repayments to a 401(k) come out of your paycheck after-tax but post into your 401(k) as pre-tax. Then when you close out your account at retirement you are taxed again on the same money because it posted to your account as pre-tax. So you are basically double taxed on the loan.

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    Eruption KleeHee's Avatar
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    Quote Originally Posted by jordacr View Post
    While it is true that you pay yourself back with interest, it is still not a good idea. Loan repayments to a 401(k) come out of your paycheck after-tax but post into your 401(k) as pre-tax. Then when you close out your account at retirement you are taxed again on the same money because it posted to your account as pre-tax. So you are basically double taxed on the loan.
    I think you're looking at it squirley. The funds your withdraw for the loan are pre-tax. You are making after-tax payments to repay pre-tax money. The only part you could consider being double taxed on is the interest you pay yourself. But the loan lets you avoid the penalty of early withdrawal of retirement funds (10%) and allows you to deferr paying taxes on the original 401K contribution you borrowed (generally around 20%). Essentially, you lose 1/3 of your money when you make a withdrawal (not a loan) from your 401K.

    Best advice is to roll the funds over to the current employer's plan (if they have one) and take out a loan (if they allow it). You pay the interest to yourself and not some bank. Even with the "double taxation" on the interest, it beats giving all the interest to someone else. And you don't even get "double taxed" until you finally do withdraw the money (ideally after you retire). In the meantime, it's earning interest.
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    Quote Originally Posted by KleeHee View Post
    I think you're looking at it squirley. The funds your withdraw for the loan are pre-tax. You are making after-tax payments to repay pre-tax money. The only part you could consider being double taxed on is the interest you pay yourself. But the loan lets you avoid the penalty of early withdrawal of retirement funds (10%) and allows you to deferr paying taxes on the original 401K contribution you borrowed (generally around 20%). Essentially, you lose 1/3 of your money when you make a withdrawal (not a loan) from your 401K.
    I see what he was saying - it'll take you, say, $1300 of earnings to get that $1000 to put back into the 401k since it's after tax money. That $1000 you put back would have otherwise been available for you to spend without further taxing. However, when you take a distribution after retirement, that $1000 will be taxed, so you won't have that full $1000 available to you to spend. So yes, it's getting double taxed. It's taxed before you put it in, and again after you take it out on retirement.

    Not to mention that you're not earning interest on that $1000 during the life of the loan, costing you the compounding factor over those 5 years or whatever. Sure, you're putting it back in over time, but it's costing you. If you had your money in, say, the Janus Overseas Fund which has been earning like 30-40% over the last 4-5 years, that loan probably just cost you more than taking the loan from a bank.

    Is it better than taking the money out as a distribution? Yes. Is it a good idea in general? Not even remotely.

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    Romeo Delight jordacr's Avatar
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    Quote Originally Posted by KleeHee View Post
    I think you're looking at it squirley.
    Before you take a loan out on your 401(k), all of the money in the account is pre-tax. So when you take a loan, you are borrowing pre-tax money. The payments going back in to pay back the loan are coming out of your paycheck after-tax but are categorized as pre-tax in the 401(k) account. After the loan is paid off, all of the money in the 401(k) account is still labeled as pre-tax money even though you just paid off the entire loan with after-tax money. If/when you finally take a full distribution of the 401(k) account the ENTIRE account is taxable. So you paid taxes on the principal and interest payments as they came out of your paycheck and then you will pay tax on your total 401(k) account balance when you take a total distribution. The portion of your balance that was the loan you took has now been taxed twice.

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    Eruption KleeHee's Avatar
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    Quote Originally Posted by jordacr View Post
    Before you take a loan out on your 401(k), all of the money in the account is pre-tax. So when you take a loan, you are borrowing pre-tax money. The payments going back in to pay back the loan are coming out of your paycheck after-tax but are categorized as pre-tax in the 401(k) account. After the loan is paid off, all of the money in the 401(k) account is still labeled as pre-tax money even though you just paid off the entire loan with after-tax money. If/when you finally take a full distribution of the 401(k) account the ENTIRE account is taxable. So you paid taxes on the principal and interest payments as they came out of your paycheck and then you will pay tax on your total 401(k) account balance when you take a total distribution. The portion of your balance that was the loan you took has now been taxed twice.
    Try to follow me here:
    You put $2,000 in your 401K, pre-tax.
    You withdraw $1,000 from your 401K in the form of a loan. You still do not pay taxes on it.
    Yes, your loan payments are after-tax. However, you are repaying (or replacing) the $1,000 that you never paid taxes on. How is that double taxation?
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    Romeo Delight jordacr's Avatar
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    Quote Originally Posted by KleeHee View Post
    Try to follow me here:
    You put $2,000 in your 401K, pre-tax.
    You withdraw $1,000 from your 401K in the form of a loan. You still do not pay taxes on it.
    Yes, your loan payments are after-tax. However, you are repaying (or replacing) the $1,000 that you never paid taxes on. How is that double taxation?
    Using your example:

    You put $2,000 in your 401K, pre-tax.
    You withdraw $1,000 from your 401K in the form of a loan. You still do not pay taxes on it.
    Yes, your loan payments are after-tax. However, you are repaying (or replacing) the $1,000 that you never paid taxes on. (Becasue the payments were after-tax, you have now paid taxes on the 1,000) This is the first taxing

    Now that the loan is repaid in full you account balance is back at $2,000 (I know there was interest on the loan and investment earnings but i am trying to keep it as simple as possible). If you were now to take a full distribution of this account payable to yourself, you would be taxed on $2,000, 1,000 of which you were already taxed on before it was taken out of your paycheck as loan repayments.
    Last edited by jordacr; 11.20.07 at 12:55 PM.

 

 

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