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Stupid 401k question - Whatever, I have no shame

slayer202

slayer202

Lifer
I haven't had a job with benefits for too long, so I don't have much experience with my 401k yet. I have one question that I can't seem to find an answer to.

Every resource makes it seem like it should be a crime to early withdraw from your 401k. Ok, that's fine, I understand why they say you shouldn't.

But isn't it better than not contributing at all? Can't I contribute 3% with 100% employer matching(vested immediately) or 5% at 80%, and withdraw the money tomorrow at a profit(after tax and penalties)? Am I missing something? I feel like I have to be missing something since I don't see a situation like this mentioned anywhere, but who the hell knows.
 
Provided that you will not need that money in retirement, and are 100% vested, and have a plan that allows early withdrawals, it's possible, but not recommended. Especially if you're taking that money and investing it elsewhere, because a 401K can hold all sort of assets.

A better option is to take a loan against it.
 
it's because compounding interest is the primary factor in generating future retirement funds. if you withdraw early and are depending on that money for retirement, you essentially are not only taking the principal amount but X number of years of compounded interested on it. as stated earlier, if you dont need it, then yes you have a way of making some extra money. typically company wont let you take the company match until you're vested or partially vested though.
 
Elbryn said:
it's because compounding interest is the primary factor in generating future retirement funds. if you withdraw early and are depending on that money for retirement, you essentially are not only taking the principal amount but X number of years of compounded interested on it. as stated earlier, if you dont need it, then yes you have a way of making some extra money. typically company wont let you take the company match until you're vested or partially vested though.
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Well yes, I'm not that dumb 🙂

But I guess I got my answer, that even if I don't plan on keeping the money in there forever it's still a no brainer to get whatever the employer matches
 
Most companies do not give you their match until you are there for 5 years.
They will give you 20% of their matched portion each year up to 5.

Are you fully vested already? Even if you are partially vested, it's still worth the match.
Always contribute up to the employer match, unless you only plan on staying less than 1 year.
 
To answer your original question: it is better to get the match and immediately withdraw the money than it is to not participate at all. I've worked with folks who refused to participate in the 401k because they didn't want anything deducted from their checks. They would not be believe that by getting the match and then withdrawing everything that they would get more money even when shown the simple math. In this case the plan (university) was ridiculously generous with 2:1 match up to 5%. That is, the university would match employee contributions 2:1 so if the employee contributed 5% the university would kick in 10%. I wish I still had that plan.
 
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slayer202 said:
I'm pretty sure they match from the beginning and its vested from the start. I'll double check of course
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They always match from the start, but your 401k will have an Employer Contributions bucket, which you earn that over a 5 year period, 20% per year. You are "vested" by ~20% each year, or however your company is setup.
 
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IronWing said:
To answer your original question: it is better to get the match and immediately withdraw the money than it is to not participate at all. I've worked with folks who refused to participate in the 401k because they didn't want anything deducted from their checks. They would not be believe that by getting the match and then withdrawing everything that they would get more money even when shown the simple math.
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It depends how long they are staying at the company.

1000 / mo salary
Your contribution: 6% - $60
Their Contribution: 6% - $60
Total 401k balance paycheck 1: $120

If you quit after the first month your 401k balance is: $60 (the company takes their $60 back because you aren't vested yet)
If you withdraw your $60, you only get $60-6 (10% early withdrawal penalty) = $54... so you actually lose money...
Then you have to pay income tax on that at around 30%.
Out of the $60 you paid in, you end up with $38.
 
You have to really think about the future here as well, what are you going to do @ retirement? If your like allot of people and think social security is going to help you... Well I would really advice you to reconsider that...
 
edro said:
It depends how long they are staying at the company.

1000 / mo salary
Your contribution: 6% - $60
Their Contribution: 6% - $60
Total 401k balance paycheck 1: $120

If you quit after the first month your 401k balance is: $60 (the company takes their $60 back because you aren't vested yet)
If you withdraw your $60, you only get $60-6 (10% early withdrawal penalty) = $54... so you actually lose money...
Then you have to pay income tax on that at around 30%.
Out of the $60 you paid in, you end up with $38.
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My employers have offered 100% vesting from day one so you are correct, it depends.
 
edro said:
They always match from the start, but your 401k will have a "Vested" amount, which is the amount they contribute. You earn that over a 5 year period, 20% per year.
Unless your company doesn't do vesting and give you all of their contributions from day 1... which is not normal.
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It really depends on the company.

I've worked at major corporation and received immediate vesting.

Another company I've worked for, it's like 1 year before you are 100% vested.

I've done a lot of 401(k) audits and have seen the policies of many companies. You are right in that some companies do the 5 year thing. Others have 0/33/66/100%, some no requirements, etc.
 
401k is basically a scam. Put your money in with a high chance you could be dead by the time you can withdraw without penalty.

Or you could show self restraint and stuff it in a mattress, or buy gold/silver.
 
A small company I worked for gave a large match, on the 5-year vesting plan. (20% each year). The two gigantic companies I've worked for have been a much smaller match, but immediately 100% vested. So it varies.
 
You are much better off taking a loan if you need the money if you can afford the payments. There no tax implications and no penalties. You pay interest to yourself(usually whatever the prime rate is) over five years. If you are using it as a down payment on a home most plans allow the payments to be stretched over ten years.
 
You're going to get it with a 35%-40% tax bill if you take it out early, and that puny few thousand dollars now could have been hundreds of thousands of dollars when you retire.

It's like robbing yourself when you get older.
 
i dont understand everyones math here...

early withdrawl is subjected to an additional 10% penalty tax, that will likely wipe out whatever match the company is giving you...

so lets say you contribute 1000 pre tax dollar and you are taxed at 25% rate. if you hadnt contributed, you would pocket $750. if you contribute and get a 5% match, then you have 1050 in your 401k. if you withdraw, you pay 25% tax rate (262.50) + 10% penalty (105), leaving you with 682.50. Its worse.

Now if you are thinking of teh scenario where you leave it in there, and it grows, and you take it out early. You still take the 10% hit. You might still 'make' money, but at a very expensive cost.
 
HardcoreRobot said:
i dont understand everyones math here...

early withdrawl is subjected to an additional 10% penalty tax, that will likely wipe out whatever match the company is giving you...

so lets say you contribute 1000 pre tax dollar and you are taxed at 25% rate. if you hadnt contributed, you would pocket $750. if you contribute and get a 5% match, then you have 1050 in your 401k. if you withdraw, you pay 25% tax rate (262.50) + 10% penalty (105), leaving you with 682.50. Its worse.

Now if you are thinking of teh scenario where you leave it in there, and it grows, and you take it out early. You still take the 10% hit. You might still 'make' money, but at a very expensive cost.
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I don't think you're understanding.
 
HardcoreRobot said:
i dont understand everyones math here...

early withdrawl is subjected to an additional 10% penalty tax, that will likely wipe out whatever match the company is giving you...

so lets say you contribute 1000 pre tax dollar and you are taxed at 25% rate. if you hadnt contributed, you would pocket $750. if you contribute and get a 5% match, then you have 1050 in your 401k. if you withdraw, you pay 25% tax rate (262.50) + 10% penalty (105), leaving you with 682.50. Its worse.

Now if you are thinking of teh scenario where you leave it in there, and it grows, and you take it out early. You still take the 10% hit. You might still 'make' money, but at a very expensive cost.
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The match is 100% up to 5% of your salary... not 5% of your contribution.

If 5% of your pay is $1000, they also contribute $1000... and you would be making $20k/paycheck and are a rich bastard.
 
Also check on whether you are banned from contributing for a while if you take a withdrawal. Our plan has that restriction - if you make a withdrawal, you can't participate again for a year. That should factor into your decision, since you could potentially be forfeiting the match for a period of time.
 
kranky said:
Also check on whether you are banned from contributing for a while if you take a withdrawal. Our plan has that restriction - if you make a withdrawal, you can't participate again for a year. That should factor into your decision, since you could potentially be forfeiting the match for a period of time.
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Hmm good to know, I'll check
 
edro said:
The match is 100% up to 5% of your salary... not 5% of your contribution.

If 5% of your pay is $1000, they also contribute $1000... and you would be making $20k/paycheck and are a rich bastard.
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ahhh yeah thats right. so my math is all wrong. it would be 5% of the earnings, not 5% of the contribution. i could see you coming out ahead (short term) in that case (with immediate vesting).
 
edro said:
They always match from the start, but your 401k will have a "Vested" amount, which is the amount they contribute. You earn that over a 5 year period, 20% per year.
Unless your company doesn't do vesting and give you all of their contributions from day 1... which is not normal.
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You don't understand what vesting is or poor at explaining things. Either way, you are spreading misinformation.

The match that they offer is always put into the account (according to the rules of the plan). If they offer a match up to 5% of your salary, if you put in 2%, they put in 2%. You put in 5%, they put in 5%. You put in 10%, they put in 5%. There are dozens of ways they can do it, and it's easy to find out, just ask HR.

Vesting is how much of the MATCHING you are entitled to at this very moment. You are always vested 100% in the money (and returns on the money) that you contributed from your money.

There are laws governing vesting. There is what is called "Cliff Vesting" which means you are not entitled to any of the matched funds until a certain date. I believe the law restricts cliff vesting to a maximum of 5 years of service. This means if you put in 5% and you are matched 5%, up until 5 years of service (or whatever schedule they have), you are entitled to half of the money in your retirement account, which is equal to what you contributed plus the gains of that contribution.

"Graded vesting" is a ramp up vesting. The "20% per year for 5 years" is an example. After the first year, you are entitled to 20% of what the company has contributed to your 401(k) (plus related growth), after the second year, you are entitled to 40%, etc, etc. The laws regarding this is that if you use graded vesting, you must be vested 100% by (iirc) year 7.

There is a penalty for early withdrawl from your 401(k). You are penalized 10% of the money you take out on top of the normal tax rate. Assuming you are in the 25% tax rate, you will lose 35% of what you withdrawl to taxes and penalties. There are certain conditions that would exempt you from the penalty, but I'm betting you do not fall under those.
 
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