Cashing out Roth 401k question

[Free4Life11]

I can find very little information on this so I wan't to make sure I have it correct. My balance is $6000, of which $2500 were my contributions (the rest were employer matching and a small gain). So that means $3500 will be charged a 10% penalty and charged 15% for income taxes (I'm in 15% bracket), for a total of $875 in taxes due. This means if I cash out I get $4800 cash ($6000 - 20% witholding) and the taxes/penalties due would be $875 (which the witholding would more than cover). Am I correct? And before you say it, no I don't have a "tax professional" or "tax adviser" to speak to.

I realize cashing out is a "horrible" thing to do, but honestly I had no intention of using this Roth for retirement. I started it because I knew I would leave the company within a few years and the savings accounts don't pay jack these days. I figure my "deposit" of $2500 has netted me over a 100% return, even after taxes/penalties! Pretty damn good I think.

 

[Juliee8]

You will have the 10% penalty for early withdrawal on the entire amount of $6000. So you would have a $600 penalty when you file your 2010 tax return.

 

[perkinsrose]

www.biblemoneymatters.com/2010/07/roth-ira-withdrawal-rules


I found this in a quick google search of "Roth IRA withdrawl." It has a good overview of the rules.

I had always thought I could withdraw my principle investment amount ( not any interest earned ) at any time without penalties--one of the big differences from traditional IRAs...

 

[Free4Life11]

Thanks for that link! I still think only $3500 is subject to the 10% penalty, because the other $2500 were my contributions and I've already paid tax on them. I hope I am not wrong, but if I am it's only $250.

 

[SandrA9810]

I thought when your contributions were made, it was tax exempt. All that stuff, health insurance, 401k, pension, FSA... at least it was for me. The only time I've seen something taxed, was when I was on Kari's insurance as a domestic partner, and my coverage was taxed.

 

[msmayor]

Pretty damn good I think.

Actually, no...not "pretty damn good". You're 'giving' away a lot of money that you've earned.

Why cash it out completely? If its been savings all along, why not just roll it into a regular Roth IRA and let it CONTINUE earning and growing, tax-free...until you turn 59 1/2 and can cash it out without paying a dime in taxes and penalties?

 

[janette]

Unless you really need it the rest I'd just withdraw the 2,500 that is your contribution - this will have no tax / penalty roll the rest into another IRA or Roth if you don't want to leave it with your employer. You won't lose anything but the potential earnings on the intial 2,500 and also have a nice IRA that will continue to grow.

 

[Free4Life11]

Actually, no...not "pretty damn good". You're 'giving' away a lot of money that you've earned.

It's all relative. I look at is as giving away my employers money. Had I put that $2500 into a savings account I'd have, oh I don't know, $2600? LOL, so I think putting it into the Roth and then cashing out gave me a far greater return.

 

[msmayor]

It's all relative. I look at is as giving away my employers money. Had I put that $2500 into a savings account I'd have, oh I don't know, $2600? LOL, so I think putting it into the Roth and then cashing out gave me a far greater return.

Are you fully vested in the matching contributions? There are ERISA guidelines that could require you to have a certain number of years of service with the company to be entitled to actually receive the matching contribution if you leave their employ.

 

[crisi]

I thought when your contributions were made, it was tax exempt. All that stuff, health insurance, 401k, pension, FSA... at least it was for me. The only time I've seen something taxed, was when I was on Kari's insurance as a domestic partner, and my coverage was taxed.

Not if you withdraw early, then you are subject to taxes on the gain and penalties on the early withdrawl.

 

[SandrA9810]

Yeah, I'd expect to pay taxes/penalty if I withdrawal early, on the entire amount. If the were tax exempt putting it in, I'd expect to pay taxes taking it out.

Even once you leave the company, there's nothing wrong with letting it grow. I haven't done a thing to my Disney 401k. I have all my previous options, I just can't add to it if I'm not with the company. Truthfully doesn't bother me.

I get what the OP is saying, it's free money almost. Even after taking out the taxes. But besides having the money in your hands to spend freely, is there a desperate need to withdrawal it?? My amount is much smaller, and while it might've helped temporarily, it's not going to make a major difference. So I leave it in there, and eventually down the line I hope it'll add up to even more.

 

[MommyJack]

I understand what you're saying that it's "free" money from your employer, but I actually think you worked for it. Any retirement contributions are part of your compensation package and therefore money you worked for.

I agree with other posters who have said, if you don't need it, roll it over and let it grow. You can always take it out later if you need to. You should try to keep as much as your "free" money as possible, for as a long as possible.

BTW, good for you, I think it's great that you even have these options.

 

[Free4Life11]

Thanks for the comments...lots of food for thought!

 

[bellarella]

Just for clarification, since a lot of the people on this thread seem to be confused....

OP is talking about a ROTH 401(k).

Roth 401(k)s are like Roth IRAs -- you put in your money post tax and then withdraw everything tax-free (assuming it's a qualified withdrawal).

With "regular" 401(k)s and IRAs, you put the money in pre-tax and then pay tax on everything when you withdraw it.

OP -- sorry, I don't know the rules on early withdrawal to say anything substantive on that topic.

I will say, though, that though the "extra" money was your employer's, it's yours now. You can have $5125, or if you average 5% a year, you could have $16,276 tax free in 20 years. It may not seem like that much, but by withdrawing now, in that scenario, you're throwing away over $10,000. And it's all these drops in the bucket that are going to add up to what you have to live on some day (assuming you don't have a trust fund stashed away somewhere ).

Also, someone else mentioned, you should check on the vesting rules of your company match.

 

[jlima]

Are you fully vested in the matching contributions? There are ERISA guidelines that could require you to have a certain number of years of service with the company to be entitled to actually receive the matching contribution if you leave their employ.

DEFINITELY check into this. I forfeited about $400 from the job I left in 2002; you had to be with the company for 5 years to keep 100% of the company match and I missed it by 6 months. There was a sliding scale and after 4 years I could only keep 75%. And this was rolling the 401K into an IRA.