Hypothetical question for 401K savy people

Discussion in 'Budget Board' started by marshallandcartersmo, Jan 18, 2008.

  1. marshallandcartersmo

    marshallandcartersmo DIS Veteran

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    This is a totally hypothetical question, thank God. But I'm sure it's happened to people before.

    DH works for a large credit company, makes about $45K a year, has about $80 in 401K. There are some lay offs in his company, thankfully not in his department. With the layoffs, depending on how long you work at the company you get X amount of weeks paid in your severance. If this were to happen to DH...........he'd get about $40K a year. He said last night if this ever happened to him, he'd take the severance, take $50K out of the 401K and pay off our house (we owe about $95K) on it. That way we wouldn't worry about loosing the house.

    I've been thinking about it all day. Would that be a smart decision or a crazy decision. I'm voting crazy, because you could always just look for another job paying the same amount of money. He voted not crazy, with this ecomomy it would be difficult in our area to find another job making what he does now.

    Again, totally hypothetical here.......
     
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  3. Irin997

    Irin997 DIS Veteran

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    IMHO it is NEVER a good idea to take anything out of your 401k. Besides, you only owe $95,000 and that's hardly anything these days. If worse came to worse you could always refinance that amount just to stretch the length of the loan in order to minimize the payments. IF he took the $40k and put that towards the house than the balance would be a measly $55k. Is it really worth losing $55k for your retirement just to pay off a house that you can easily pay off until your retire?
     
  4. Irin997

    Irin997 DIS Veteran

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    ALSO, any money you take out of 401k you have to pay back plus interest
     
  5. dis-happy

    dis-happy DIS Veteran

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    His idea is bad, bad, bad. Not only will he incur taxes and penalties on top of the 50k, he'll also lose all the growth protential of that 401k for future retirement. How much are your monthly house payments? If you are really worried about the economy and losing his job the best thing is to save, save, save 6 months worth of house payments and expenses into an emergency fund, and use that during the time he's looking for another job (does he really think he'll never find another job ever???). If you really couldn't afford the house you'd be better off selling it for the long-term solution. I'd be touching the 401k ONLY as a very last resort.
     
  6. dvcgirl

    dvcgirl DIS Veteran

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    I can understand why you'd be worried, but you're not in terrible shape there. You use that 40K in severance as your emergency fund until you find that next job, and leave that 401K alone. The penalties and taxes you'll pay on that 401K are big...you'd have to take much more than 50K out to cover that. In short, I think you are correct :).
     
  7. Toby'sFriend

    Toby'sFriend The thing about growing up with Fred and George is

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    terrible idea
    In addition to the penalties and interest, and the devastating effect of losing your compounding power...

    what if you fully paid off the house and then the only job he gets offered is 300 miles away?

    All your money would be tied up in a house that you might not be able sell.

    In times of crises you need to remain as liquid as you possibly can.
     
  8. bnorm27

    bnorm27 DIS Veteran

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    I believe the penalty on such a withdrawal is at least 20%, PLUS, you have to claim that money on your taxes. You would take a HUGE hit! There are hardship withdrawals allowed, but I think you would need to be in foreclosure proceedings to even think about those.

    I'm sure your hubby could get the severance PLUS unemployment.

    Don't do it!
     
  9. PatsMom

    PatsMom <font color=blue>Sometimes has Dory moments!<br><f

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    The penalty on early withdrawal is 10%. Plus of course regular income tax on the withdrawal. So for a $40,000 withdrawal you would pay $4,000 in penalty plus income tax. And if he got severance pay that year you could be in a fairly high tax bracket. If you assume the entire distribution was in the 25% marginal tax bracket, $40,000 would generate a tax liability of $10,000 besides the penalty. And you would not have the assets growing for retirement. Not something that sounds like a wise financial decision to me.

    If you have an emergency fund, you can pay the mortgage from that if you have to for a while. It also sounds like you would have a fair amount of non-qualified severance pay to live on. The mortgage payment could be made from that. If DH really thinks that he won't find another job, as someone else said, you could be looking at having to relocate and having more money tied up in real estate just wouldn't make sense.
     
  10. dsanner106

    dsanner106 DIS Veteran DVC Gold

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    I would do a combination of a sort. Leave the 401K alone, they would probably withhold 10-12,000 of a 40,000 dollar withdrawal. No longer enough to pay off, so you would have to dig deeper. I would take the cash for temporary expenses, ask my mortgage company to move a couple payments to the back of the mortgage (They will often do this if you are a good customer and have a job loss). Then your expenses are reduced for a couple months, live cheaply and when he lands a new job and gets his first check, take the remaining cash and pay down your mortgage. you should still cut it in half and still have your 401K.
     
  11. RayJay

    RayJay DIS Veteran

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    Hi Marshall,

    First of all, you would have to take the whole $80 grand and then your only going to get $48 after you subtract all the taxes and penalties. They are only going to take 20% for federal and 5% for state, however once you do taxes LOOK OUT it'll be another 25% because of how it's figured. Trust me your only going to get about 60% of that $80 grand when it's all said and done.

    So you will still owe $7,000 on the house which ain't bad, I like the one poster's idea of using the $40,000 in an e-fund. A $55,000 balance isn't bad to have, emotions can get in the way sometimes when you get a chance at that 401k money. I know because I did it when I had $50 grand in mine, took the whole thing to get out of debt cause I was sick of it. I won't say I regret it but starting over hurt. It really was the fact I didn't get the whole amount, just $30,000.

    Just think it thru and do what's best for you guys.

    Best of luck
    RayJay
     
  12. bdcp

    bdcp DIS Veteran

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    Our financial planner said using 401K money is a bad idea. You lose all the money you would have gained in growth (which could be a lot), plus it's more like 50% in taxes and penalties. He told us if you really need money, borrow against your home (equity) and worst case, lower how much you are putting into your 401K temporarily to pay on the equity if you absolutely need to do it that way. Your 401K is your future, your retirement and nowdays people need to replace 100% of their income in retirement, not 50% like our grandparents did. My DH's company was an ESOP. We got a huge profit when it was sold this last year. We put every penny into our investments. We left some with the company 401K and rolled the rest into our other diversified accounts, including opening new ones. We are set for our retirement, but we are still adding to it. We know a few people who pulled money out and will never get back what they would have had. Even if you have to stop putting into a 401K, you'll be better off than you would withdrawing some.
     
  13. firsttimer2007

    firsttimer2007 DIS Veteran

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    If you are going to put the 40k on the house. Then what will you live on?????
    The 40k should be put into an account and house payments should be made from it. 40k used ONLY for house payments should last several years. He will find another job soon and then you will not need the 401k and maybe even have some of the 40k left over for another "rainy day".

    Removing money from you 401k is never worth it. So unless you are going to starve I would leave that oney alone.
    Debt collectors can not touch your 401k. So if everything else falls apart around you, when you are old you won't have to get a job to support yourself.

    Now is also a great time to refinance. you can get as low as 5.5% on a 30 year. You can also negotiate fees, if you have good credit.
     

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