Tapping 401K funds early.
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GQdaLEGEND
Legend
your gonna pay a hefty chunk of portion .. i think around 40%
imo better to just stop the investment from future and just leave the money alone until retirement.
imo its good to have if u can afford some to be taken out of paycheck
Smont
Legend
I think 401k is only a 10-20% penelty. I looked it up just to double check and everything says 10%.
My Annuity fund on the other hand takes 40% if i early withdrawl
Dustin07
Legend
I personally hate 401k because it's a bureaucratic flaming garbage heap wrapped in federal red tape. That said, I've had to run our corporate 401k for years and the reason I set that up was at the time it was the easiest way for me to come up with some sort of equity/profit sharing for our employees. The downfall was when it was very new and our acct was just starting relatives of ownership could not really participate (long story). Anyways, the options are poor, the returns are poor.
I believe another option you could consider if you're up for it, is borrowing against your 401k and investing that money you borrow into a different account. You would have to pay back what you borrow to your 401k, and with interest, however the interest is paid to YOU. so if you borrow say $5k on a 2 year or 4 year note or whatever it is at 4.5% that 4.5% is actually just you paying yourself back and your $5k you borrow from your own account you can invest in higher yield options.
This part is more complicated for 2 reasons:
a. depends on how your company is setup. if there is a vesting program you'd lose the matching most likely. For example our vesting is a 5 year program. We do an annual "discretionary" contribution to our contributing employees after Christmas. it's our form of "profit sharing" but it's called discretionary matching. if you are a 1 year employee and leave our company or the 401k, 20% of that is yours to keep. if you are a second year employee, 40%. and 5 years, 100%. so if you are in the 401k for 5 years you are fully vested and any contributions the company makes are yours to keep.
b. employees are required to participate in the 401 to receive discretionary contributions. so if there are 100 employees and only 20 are participating and $50k in distributed all $50k goes to the 20 that are participating and 0 to the 80 that aren't. so that's really where you get your ROI on 401k. company contributions.
Lastly, if you pull out your 401k just as a cash out, rather than a loan from your account, you will pay income taxes on it and I believe the additional penalty is 10% on top of that.
there are creative ways to use your 401k but walking away from it entirely is the worst case scenario.
I believe another option you could consider if you're up for it, is borrowing against your 401k and investing that money you borrow into a different account. You would have to pay back what you borrow to your 401k, and with interest, however the interest is paid to YOU. so if you borrow say $5k on a 2 year or 4 year note or whatever it is at 4.5% that 4.5% is actually just you paying yourself back and your $5k you borrow from your own account you can invest in higher yield options.
This part is more complicated for 2 reasons:
a. depends on how your company is setup. if there is a vesting program you'd lose the matching most likely. For example our vesting is a 5 year program. We do an annual "discretionary" contribution to our contributing employees after Christmas. it's our form of "profit sharing" but it's called discretionary matching. if you are a 1 year employee and leave our company or the 401k, 20% of that is yours to keep. if you are a second year employee, 40%. and 5 years, 100%. so if you are in the 401k for 5 years you are fully vested and any contributions the company makes are yours to keep.
b. employees are required to participate in the 401 to receive discretionary contributions. so if there are 100 employees and only 20 are participating and $50k in distributed all $50k goes to the 20 that are participating and 0 to the 80 that aren't. so that's really where you get your ROI on 401k. company contributions.
Lastly, if you pull out your 401k just as a cash out, rather than a loan from your account, you will pay income taxes on it and I believe the additional penalty is 10% on top of that.
there are creative ways to use your 401k but walking away from it entirely is the worst case scenario.
GQdaLEGEND
Legend
I think 401k is only a 10-20% penelty. I looked it up just to double check and everything says 10%.
My Annuity fund on the other hand takes 40% if i early withdrawl
ohh it might be ..so many things mightve gotten confused with 401 fees
Halfnattyman44
Member
401k penalty is 10%. If it's a pretax account you will also pay whatever your income tax rate is (10-37%) so somewhere between 20 and 47% total. You can look up tax brackets to see what you are personally. If it was a Roth 401k then it's only the 10% penalty.
The penalty only applies if you are under the age of 59.5.
401k's are potentially great and potentially fine. It all depends on if there's a match. If we assume a dollar for dollar match up to 3% then you double your money year one. So even if the investment options suck you can't beat it.
Example:
You invest $1,000 per year and they add $1,000 per year. Do this for 20 years earning 7% (below average returns) you have $82,000
Alternatively you invest $1,000 into your own account, no match. Still 20 years but you earn 12% (above average returns, which few people can do long term) you have $72,000
IF there's no match then do a Roth or IRA or non retirement/brokerage account. Those will depend on how much you're saving, current tax bracket, age, etc.
The negative of a 401k is the added restrictions due to people complaining after the 08 crash. So there's penalties, fees, limited investment options, etc. But all of those complaints are overblown and 99% of people would benefit from contributing to their 401k (especially if there's a match).
The penalty only applies if you are under the age of 59.5.
401k's are potentially great and potentially fine. It all depends on if there's a match. If we assume a dollar for dollar match up to 3% then you double your money year one. So even if the investment options suck you can't beat it.
Example:
You invest $1,000 per year and they add $1,000 per year. Do this for 20 years earning 7% (below average returns) you have $82,000
Alternatively you invest $1,000 into your own account, no match. Still 20 years but you earn 12% (above average returns, which few people can do long term) you have $72,000
IF there's no match then do a Roth or IRA or non retirement/brokerage account. Those will depend on how much you're saving, current tax bracket, age, etc.
The negative of a 401k is the added restrictions due to people complaining after the 08 crash. So there's penalties, fees, limited investment options, etc. But all of those complaints are overblown and 99% of people would benefit from contributing to their 401k (especially if there's a match).
Dustin07
Legend
really, only if there is a match. They're stupid expensive to maintain in fees, but employees don't usually get strapped with the fees, that's a corporate cost that is usually absorbed. Like you pointed out the benefit is the match from your employer generally. The other huge benefit to 401k is that automagic aspect. The truth of the matter is most humans are bad at saving and when you set up an automatic savings like this it is likely going to benefit the average person 10x better than anything they'd do on their own (cause they probably won't)
Halfnattyman44
Member
Yes, this 100%. My clients all use their 401k first up to the match. Then we go outside of the 401k with additional money. But for the everyday person that doesn't know and doesn't seek out any guidance a 401k is still better than nothing, and just set it and forget it. Without a plan retirement will never happen, especially with Social Security most likely getting pushed back to 70 or later.
Beau
Well-known member
You didn't ask this question and may not want this advice - I would STRONGLY encourage you to stay in the 401K (even better if it is a Roth 401K), at least up to the match. Free money is a really good deal. Investing early in your life (and then continuing), is sage advice. The magic of compound interest is amazing, especially over a long time frame.
Dustin07
Legend
I don't disagree that the economy is a sham and that we are in a recession. savings accounts at 20 year lows, credit cards at record highs. the GDP is being funded off the backs of middle class debt, that's a recession by a different name, really.
But that said I'd ask your HR folks more about the companies 401k plan and squeeze the most ROI out of it you can. the returns on the investments won't likely be high, but maxing out the companies match is always a good play.
But that said I'd ask your HR folks more about the companies 401k plan and squeeze the most ROI out of it you can. the returns on the investments won't likely be high, but maxing out the companies match is always a good play.