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# 401 k loss or gain?

Ranch Hand
Posts: 5040
Seriously, not meaningless drivel please. Thanks.
Last week I was in a discussion with a friend of mine on this topic and couldn't explain it very well. So here's the situation.

You are below 40. You put 6% (say 1000/- for easy Math) into a 401K account. Company matches 50% upto 6%, so in this case 3%. In one year, the total is 1500/-, right?

You withdraw everything. 10% penality is 150/-. Net profit is 350/-. You pay tax on 1500/-.

Is that all or am I missing anything?
Thanks.

- m

Ernest Friedman-Hill
author and iconoclast
Marshal
Posts: 24211
35
Depends whether we're talking pre-tax or after-tax deductions. If you took it out pre-tax, then you owe tax on the principal and interest. If you took it out after-tax, then you owe tax only on the interest. Or at least, that's how I believe it goes.

Roger Johnson
Ranch Hand
Posts: 311
You put 6% (say 1000/- for easy Math) into a 401K account. Company matches 50% upto 6%, so in this case 3%. In one year, the total is 1500/-, right?

You withdraw everything. 10% penality is 150/-. Net profit is 350/-. You pay tax on 1500/-.
- m

i am not a 401k expert, but i believe here is how it works:

you deduct \$1,000 from your paycheck prior to tax, your company match \$500 in the form of company stock. your contribution is in mutual fund or whatever your choice is.

then all these are fluctuate with stock market. one day you want to take it out, you treat them as income for that year, so you need to pay tax based on your bracket, if you are under 59.5, you pay additional 10% on top of tax.

so after a year, you want to take it out, assume your company stock and all your mutual fund are the same, then you still have \$1,500. how much tax you need to pay, depends on what is your income for that year. but one thing is for sure that you need to pay \$150 (\$1,500 x 10%) for earlier withdraw penalty.

Matt Fielder
Ranch Hand
Posts: 158
the short of it.

Unless you qualify for hardship exceptions etc, DO NOT take a disbursement against your 401k. They will take about 40% of your funds. If you can handle that hit, fine. Also, DO NOT take a loan against it either. Not only do you owe yourself interest, but if you leave your job either by choice or by force, that loan can be called within 30 days. If you default on the loan, you have problems.

I highly recommend against screwing with your 401k funds unless you are beyond desperate.

Marc Peabody
pie sneak
Sheriff
Posts: 4727

You are below 40. You put 6% (say 1000/- for easy Math) into a 401K account. Company matches 50% upto 6%, so in this case 3%. In one year, the total is 1500/-, right?

You withdraw everything. 10% penality is 150/-. Net profit is 350/-. You pay tax on 1500/-.

I see your point. Yes, you would basically get to pocket free money (approx. \$350 pretax) even after taking the 10% hit.

Most employers that I know of put a "vested" period on the amount they match. You may only be 20% or so "vested" after one year, meaning that you can really only pocket 20% of what the employer claims to match. Sometimes it can take 5 years to become fully vested. This would foil your plan.

Mark Spritzler
ranger
Sheriff
Posts: 17278
6
Listen to Matt. To add to what he said, when you do pay yourself back you are replacing pre-taxed money(what was in there to start) with post-taxed money, after tax has been taken out of your paycheck, then you make a payment from that money. So you have to pay even more.

If you leave a company, always, always, always roll it over into a pre-taxed rollover IRA, like ones at AmeriTrade. The reason why you shouldn't keep it in the companies 401K is because most company 401K plans only have a handful of mutual funds you can choose, and that is all, no stocks or other funds to invest. When you rollover to a Rollover account, you now have the entire stock market open to your retirement investing.

Mark

Ranch Hand
Posts: 5040
Thanks. I agree with Matt and other views here. That was exactly my argument (with my friend). If you have even the slightest chance of withdrawing, put it in an IRA of some kind. But his argument was I am losing the company match so I am not doing it. With this 401 K thing, he says he is profiting \$350/-, other conditions remaining the same.

The tax payments and the 10% penality we both agreed on. My point here was, the concept of 401 K is different - it is to be used purely for retirement (with the HARDSHIP exceptions as mentioned) for the most part. His argument was I can make a quick profit of \$350/- per year. We did agree on the vesting period though. I was not able to make the point that 401 K accounts are primarily used to 'invest' for the long run. Investing in mutual funds and stocks (well, except for the Enron's) in the loooong run will give a ROI of more than \$350/-. That's the way I look at 401 K.

Anyways, that was just a discussion. Looks like two sides of a coin.

- m

Kishore Dandu
Ranch Hand
Posts: 1934
Originally posted by Matt Fielder:
the short of it.

If you default on the loan, you have problems.

I highly recommend against screwing with your 401k funds unless you are beyond desperate.

If you default on the loan, it is considered as a distribution and u end up paying tax at the end of year tax filing(your tax rate + 10%).

Desperate it it highly likely is in situations wheere someone is looking at 401k for money withdrawal.