Cashing in 401 K??

[bcarson]

Okay please before anyone jumps me. Hear me out. This is a mere passing thought in our minds at this point. Dh has his 401 k with our company now. But he also has a small one from a company, his work used before. Some people transferred it over. Dh fiddled around and never did. So now this one probably has less then $5000. I don't even know the amount at this time.

We have been scared about the state of the economy and contemplated cashing the small one in, to just put in savings for the what if.... We are making cuts other places. But we do have bills that, yes we probably should not have. Not any extravagent house or cars. Just some misc. debt. We can probaby squirrel away some each month. But I would feel better knowing that I had a cushion now. I mean one car repair and that would be gone. KWIM.

So what are the ramifications of doing this? We of course would consult are tax person. But was hoping for some real life expierences. Thanks.

 

[kellyg403]

Definitely talk to a tax consultant. I had a small 401 from a company I worked for back in the 90's. It was a small one, that never really grew into anything. Everytime I would get one of those letters in the mail to tell me how much was in there, the fees for it being there were more than I was making. Last year in June, I noticed it was decreasing alot...and now was around 4000. So, I cashed it in. After taxes..roughly 33%..it was a check for around 2500 or so. I don't regret doing it. I have another 401 with the company I am with now. Did I lose money? Yes. But, I felt like I was losing it anyway. I put the money I got from it into a share add on account at our bank. I can't touch the money without penalty for 12 months and then it rollsover if I leave it be.

Definitely explore your options.

Kelly

 

[bcarson]

Thanks for the thought Kelly. I think if we don't cash it in Dh should definately transfer it. I never thought about him paying fees for both.

 

[Karenj2]

As the PP said, you're going to get slammed with taxes if you take it out now. I know that the 401k we have says (and I think this is true for all of them), you CAN withdraw your 401k in its entirety without penalty IF you can prove financial hardship. Who knows whether or not the rules will change on us in the future, though...

That being said, IMHO, you should leave it until you absolutely need it.

 

[jlparedes]

I did something similar last year when I was laid off. I thought I would regret it, but it helped out when we needed it and we knew what we would pay in taxes and were ok with that. Just know the tax ramifications and you can decide from there.

 

[seashoreCM]

Do run this past a tax consultant first. I'm quite sure you can take that 401k and close it and move its contents to a regular IRA and still make your regular IRA contribution of $2000. or whatever for the year. No penalties or tax due here.

I would not cash it in and get regular cash, due to the penalties involved.

Disney hints: http://members.aol.com/ajaynejr/disney.htm

 

[RitaE]

the ramifications is your current income tax rate plus a 10% penalty plus whatever State taxes you might pay.

If all you want to do is put it in a Savings Account then I would suggest that you convert it to an IRA and put it in a Savings Account or CD within the IRA.
If you do a direct rollover, you can accomplish this with no penalty.

Then if "what if" occurs, you can cash out the IRA at that time.

 

[CalvaryMike]

You'll get hit with a 10% Federal and a State tax (people seem to miss this one) penalty. The amount of the state penalty depends of course on where you live. Then you'll get hit with the taxes that were deferred. So, your $5K could easily be only worth $2,500 after all said and done. Also, based on your current tax bracket that extra $5K could move you into a higher tax bracket.

IMHO, I would roll it over into your DH's current 401K.

 

[momxx5]

Consult a tax specialist.

The $5,000 you mention can quickly turn into substaincialy(sp?) less once you pay the early withdrawal penalties and then taxes on the sum.

Believe me, I totally understand. DH has a reasonable 401K and that sum of money would take care of a whole lot right now, but closing it is out of the question. Probably 98% of companies allow you to borrow against the 401K, except DH's company. This was really sucky last spring when we were going through a rough finanacial time.

Best advice is to roll it into an IRA or transfer into other 401K with no fees or penalties.

 

[MusiqChic99]

You'll get hit with a 10% Federal and a State tax (people seem to miss this one) penalty. The amount of the state penalty depends of course on where you live. Then you'll get hit with the taxes that were deferred. So, your $5K could easily be only worth $2,500 after all said and done. Also, based on your current tax bracket that extra $5K could move you into a higher tax bracket.

IMHO, I would roll it over into your DH's current 401K.

I agree with this poster.

Times are rough but maybe you can try other ways to get some extra cash for an emergency fund. Leave the 401k as your LAST resort.

Good luck to you and your family.

 

[Chicago526]

the ramifications is your current income tax rate plus a 10% penalty plus whatever State taxes you might pay.

If all you want to do is put it in a Savings Account then I would suggest that you convert it to an IRA and put it in a Savings Account or CD within the IRA.
If you do a direct rollover, you can accomplish this with no penalty.

Then if "what if" occurs, you can cash out the IRA at that time.

I agree with this. Since it's a small amount, it not going to affect your retirement that much. But why pay fees unless you know for sure you'll need it?

 

[deedee3]

At the end of last year, I cashed out on my 401k because i needed the money. They will tax you alot an i wish i would of known that i still have to claim it as taxable income this year and now Im hoping that it wont put me in a different tax bracket beacuse of claiming it as income.

 

[figment52]

You'll get hit with a 10% Federal and a State tax (people seem to miss this one) penalty. The amount of the state penalty depends of course on where you live. Then you'll get hit with the taxes that were deferred. So, your $5K could easily be only worth $2,500 after all said and done. Also, based on your current tax bracket that extra $5K could move you into a higher tax bracket.

IMHO, I would roll it over into your DH's current 401K.

I agree with everything but the last sentence.

Your current 401k has limited investment choices. If you open a Rollover IRA you have unlimited choices for investment. Diversify your investments. Contact an Investment Advisor and get professional advice.

With the market ride right now there is no reason to lower your accounts any further by paying taxes and penalty on the early withdrawal of the smaller 401k. Invest it, you are buying "on sale" right now and you will be happier you did when things improve.

 

[thomas998]

You would lose 10% right off the top in penalties so if it were $5000 you would get a check for $4,500... if you cashed it out.

The biggest problem I see is that you are thinking of do this when the market has just cratered.... frankly I might check about putting it into a IRA... if you do you need to make sure they cut and send the check directly to the place where your going to start the IRA, if it goes to you or the check is written out to you then you get hit by the 10% penalty... and if that happens would have to go by the limits on what you can put into a IRA... if you had been putting stuff in it already this year and only had $500 left that you could put in then you would only be able to put $500 of the 4500 in and would have to put the 4000 somewhere else...

The biggest question you need to ask is what is the money invested in right now in the 401K... if its in a fund you would likely use then why bother with moving it... it you are restricted to only a few investments which you don't like then by all means move the money to an IRA you can control.... but don't do it until you understand how to do it without getting hit with the penalty.

 

[Poohbug]

If this is not money that you need right now, I would use a direct rollover and the transfer the money into and IRA CD at your bank. That way you will not be taxed on the money and you will not be paying brokerage or acct. fees.

If there comes a time when you really need the money it will be available to you. When you take it out you will pay Federal and State taxes on the amount taken. You will also have to add the amount to your income for taxes. You will also pay a penalty-both Federal and State.

If you do this-make sure you have a DIRECT ROLLOVER. The check should go directly to your new IRA account. If you get a check made out to you, this is not a direct rollover. You can still roll over this money but 20% will have already been taken out for Federal taxes. You must then add 20% of your own money to the IRA or the 20% will be subject to penalty and taxes.

 

[santa's surpriz]

So if I'm hearing ya right...you're scared about loosing money in the market, so you are going to throw it away ...to the IRS instead? I know that is harsh, and I do apologize but it's another POV to think about. If you are that worried, why not roll it into a bank IRA? Or look into rolling into an annuity. Cashing it out will lose a huge chunk, IMO not a good move throwing away money in today or any day's market.