Join 3,561 readers in helping fund MetaFilter (Hide)


Cashing out a 401k without Penalty these days?
November 11, 2008 2:55 PM   Subscribe

Cashing out my 401K without penalties?

Hey,

So I'm 26 and I have a good amount of debt built up from a recent job change. I really would like to cash out my old 401K from my previous employer and I heard rumors that they were going to remove the penalties for doing so soon in order to help people pay down their debt thanks to the credit crisis. Is this just a rumor, or is this going to be a reality? When can I expect to see some action on this?

Can anyone point me towards information about this stuff?
posted by ZackTM to Work & Money (13 answers total)
 
Obama, the Democratic candidate, has said consumers should be allowed to withdraw as much as 15 percent of their 401(k) plans or Individual Retirement Accounts without tax penalties, up to $10,000.
posted by 0xFCAF at 3:08 PM on November 11, 2008 [1 favorite]


Also, barring exceptional circumstances, this is a terrible idea.
posted by 0xFCAF at 3:10 PM on November 11, 2008


Really terrible. Even without the penalties.

Your 401(k) is a tax sheltered account. Even if you didn't have to pain gains (ha! ha!) on the money, and even if it didn't count as income when withdrawn, you'd still be pulling you money out at the worst time!

eBay, a second job, rigid budgeting, collecting popcans would all be better than doing this.

About the only exception to this rule is if you were ready to lose your house if you didn't. As in it;s the third month of your foreclosure proceedings. Even then might want to reconsider (why sink money into something you've proven you can't afford?).

I love Obama, but this is a plain dumb idea.
posted by cjorgensen at 3:52 PM on November 11, 2008


I doubt this will happen. With the investment markets suffering seriously from lack of liquidity, the last thing Congress would want to do is make it easy for investors to withdraw from the market.

Anyway, there's no chance of any action in this area until next Spring at the very earliest.
posted by Class Goat at 3:54 PM on November 11, 2008


Also, barring exceptional circumstances, this is a terrible idea.

Unless the retirement account is bleeding away to nothing, in which case, it may as well be used for debt while there is still any value left.
posted by Blazecock Pileon at 4:27 PM on November 11, 2008


Blazecock Pileon: This only makes sense if one believes that the equity markets will never recover from where they are now.

Which, you know, is not that likely.
posted by autojack at 6:03 PM on November 11, 2008


To clarify a little bit on what cjorgensen was saying, the issue is that you were presumably putting money into this 401k when the market was doing much better. If you have $10k in your account that you could take out right now, odds are you're throwing away forever the $2,500+ it's lost in the last couple of months. Really bad idea.
posted by autojack at 6:09 PM on November 11, 2008 [1 favorite]


That money will be much more valuable to you when you are retired then now. So in addition to considering what you'll be throwing away on it due to the recent losses in the market, also keep in mind the loss of future returns on that investment. Which is many times more than the recent losses. Don't cash it out
posted by Roger Dodger at 6:45 PM on November 11, 2008


You should NOT cash out your 401 (k). You will lose 20% in federal tax and an additional 10% penalty if you're young (under 60-ish) plus whatever state taxes there may be.

Talk to a financial advisor if you need to understand it better but hardly anyone will tell you this is a good idea...

And don't take a loan either.
posted by cranberrymonger at 6:56 PM on November 11, 2008


Which, you know, is not that likely.

cough

You see that inflection point around 1985 in your graph? That's when the baby boom started PUTTING MONEY INTO THE MARKET en masse.

In 2020 the baby boom is going to start reaching 70 yo and looking to PULL MONEY OUT OF THE MARKET en masse.

You will lose 20% in federal tax and an additional 10% penalty if you're young (under 60-ish) plus whatever state taxes there may be.

I've found a way to take out up to $16,200 per year tax-free -- just take 6 hours of classes at a city college, then the full cost of attendance (which includes room and board) can be withdrawn without any penalty. (The first federal income tax bracket starts at ~$17,000 with the standard deduction and 1 personal exemption.)
posted by troy at 9:12 PM on November 11, 2008 [1 favorite]


You see that inflection point around 1985 in your graph? That's when the baby boom started PUTTING MONEY INTO THE MARKET en masse.

In 2020 the baby boom is going to start reaching 70 yo and looking to PULL MONEY OUT OF THE MARKET en masse.


troy, does that mean you believe that even bonds are going to start dropping in value? Because, if that's true, I'm not sure anything short of guns, ammo, and canned food is a good enough investment.

Only saving your house, or your health with necessary medical procedures, are a good enough reason to remove money from your 401k right now. The time has never been better in our lifetime* to expand your retirement deposits.

* (since anyone old enough to have lost money in the Great Depression is too old to continue contributing to their 401k)
posted by IAmBroom at 11:10 PM on November 11, 2008


The time has never been better in our lifetime* to expand your retirement deposits.

I tend to agree that when looking at the 30-year horizon dollar-cost averaging over the next 3 years into solid S&P 500 companies will probably not be a bad investment move, if as an inflation hedge if nothing else.

However, there were path-dependent reasons why stocks shot up 1950-1968 and 1982-2000, so blindly assuming 8% nominal returns over then next 50 years is IMO lazy and unsupportable by any sober analysis.

The first boom benefited from the delayed recover from the G.D. and us having bombed the living crap out of our major industrial competitors. These conditions do not obtain presently.

The second is arguably a demographic-driven boom that WILL reverse, or at least was unique due to the influx of savers of the boomer generation.

Investment is not savings -- it's risk. Corporate earnings & P/E ratios themselves can undergo declines, as can the enthusiasm for chasing easy returns in the stock market.

People who thought they were bottom-fishing in Japan in 1991 have lost half their money, 17 years on.
posted by troy at 3:02 AM on November 12, 2008


It remains to be seen if we will get the option to withdraw $ from a 401(k) without a 10% penalty. You would almost certainly still have to pay state & Fed income tax on any withdrawal.

You might be able to borrow against it, so that as you pay it back, you're paying yourself, which is less painful.
posted by theora55 at 2:05 PM on November 12, 2008


« Older Where to run to in 2009.....   |  I want to make an unobtrusive,... Newer »
This thread is closed to new comments.