Stupid 401k question - Whatever, I have no shame

[alkemyst]

DO NOT DO THIS.

Double taxation + fees = FAIL

LolWuT?!?!

A 401K loan has usually no major fees, usually something minor.

There are no taxes on this loan.

All the interest you pay goes into your 401K.

However, there are few methods to get a hardship loan.

 

[edro]

You don't understand what vesting is or poor at explaining things. Either way, you are spreading misinformation.

You just repeated exactly what I said (or meant to say).

You are bad at reading. 🙂

 

[Schfifty Five]

You just repeated exactly what I said (or meant to say).

You are bad at reading. 🙂

I think it is you who is bad at explaning. And it's evident with how you think the 5 year/20% vesting schedule is the default rule. While I'm sure you understand how the matching works, what you wrote was technically not correct and not the same as what GotIssues wrote:

Edro, you wrote this:

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.

The "vested" amount is not the amount which the company contributes. The company contributes whatever their matching policy is. The "Vesting" amount is how much of it you are entitled to. Do you see the difference there?

 

[edro]

I think it is you who is bad at explaning. And it's evident with how you think the 5 year/20% vesting schedule is the default rule. While I'm sure you understand how the matching works, what you wrote was technically not correct and not the same as what GotIssues wrote:
Edro, you wrote this:
The "vested" amount is not the amount which the company contributes. The company contributes whatever their matching policy is. The "Vesting" amount is how much of it you are entitled to. Do you see the difference there?

Oh, yeah... I said it backwards. My bad. Sometimes even when you re-read something you wrote, your mind forms it back to what you think it should say. 🙂

I don't think that 5 year, 20% is default, but when you are explaining something, you need to make assumptions to simplify things.

 

[GotIssues]

Oh, yeah... I said it backwards. My bad. Sometimes even when you re-read something you wrote, your mind forms it back to what you think it should say. 🙂

I don't think that 5 year, 20% is default, but when you are explaining something, you need to make assumptions to simplify things.

I didn't think you thought the 20% for 5 years was default, but the differences between what you explained vesting as and what vesting actually is could lead to drastically different contribution decisions from people, and I did not want anyone's retirement to suffer because they got (unintentionally) bad information.

 

[Lifted]

LolWuT?!?!

A 401K loan has usually no major fees, usually something minor.

There are no taxes on this loan.

All the interest you pay goes into your 401K.

However, there are few methods to get a hardship loan.

LOL after tax payback
LOL pay tax again when you start withdrawing
LOL double taxed

LOL handling fees of up to 3% depending on your plan

LOL No interest earned while pay fees + after tax payback on loan

LOL > 50% of people with 401k loans default on them anyway.

 

[KingGheedora]

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.

Yes, you can do that but you hurt yourself because if you don't withdraw more of it will be there when you retire. The free matched portion can be withdrawn for "free" I guess, but it's smarter to keep it in there. You have to save for retirement anyways right?

 

[CPA]

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.

My company and most large companies vest immediately.

 

[CPA]

LOL after tax payback
LOL pay tax again when you start withdrawing
LOL double taxed

LOL handling fees of up to 3% depending on your plan

LOL No interest earned while pay fees + after tax payback on loan

LOL > 50% of people with 401k loans default on them anyway.

What tax are you speaking of on a 401K loan?

Also, I've never, ever, ever heard of a handling fee on a 401K loan.

Believe it or not, there are scenarios where it makes sense to take out a 401K loan, particularly if the "interest rate" on which you are paying into the account is greater than the current return rate.

 

[CPA]

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.

Technically, the plan administrator will withhold 25% regardless of your effective rate. Then you pay the 10% penalty and the effective rate (you may pay more or get some back) at time of filing.

 

[edro]

My company and most large companies vest immediately.

Not the very large companies I have worked for.
All 3 were 5 years until fully vested.

 

[alkemyst]

Lifted is making up stuff he has no experience with.

He is confusing a loan with early withdrawal or some crap

 

[tedrodai]

LOL after tax payback
LOL pay tax again when you start withdrawing
LOL double taxed

LOL handling fees of up to 3% depending on your plan

LOL No interest earned while pay fees + after tax payback on loan

LOL > 50% of people with 401k loans default on them anyway.

If I take out a loan on my 401k and let the principal sit there until I pay the whole thing back with interest, the pricipal was tax-free when I took it out and was never taxed before I put it back in. The interest, however, was post-tax money before I paid it to my 401k, so unfortunately it's going to be taxed again when I withdraw down the road. However, the amount of the "double-tax" on that interest can still be very attractive compared to the interest due on a bank loan.

If I take the principal and do something with it...anything really: buy something, invest it...it still doesn't equate to being double-taxed because my non-401k assets got an untaxed infusion of that principal amount.

What you're really losing is the (compounding) interest you'd have gained leaving the money in the 401k in the 1st place.

 

[TXHokie]

LOL after tax payback
LOL pay tax again when you start withdrawing
LOL double taxed

LOL handling fees of up to 3% depending on your plan

LOL No interest earned while pay fees + after tax payback on loan

LOL > 50% of people with 401k loans default on them anyway.

The "double taxed" theory has been debunked here - http://thefinancebuff.com/401k-loan-double-taxation-myth.html

My company charge a flat $50 to process regardless of amount, not 3% - that is a lot if true.

I took out a 20k loan for my car when the DOW was at 13k - so the amount I withdraw was not hit with the downturn had I left it in my 401k when it went thru the roller coaster ride. The DOW was still at 11k when it was all paid off within 3 yrs so rough estimate, I escaped the 8% drop. On top of that I gained 3% paying back to myself. So instead of a loss, I gained 11% on the 20k I borrowed instead of paying 5% to the bank for a car loan. Is this voodoo math?

 

[IronWing]

The "double taxed" theory has been debunked here - http://thefinancebuff.com/401k-loan-double-taxation-myth.html

My company charge a flat $50 to process regardless of amount, not 3% - that is a lot if true.

I took out a 20k loan for my car when the DOW was at 13k - so the amount I withdraw was not hit with the downturn had I left it in my 401k when it went thru the roller coaster ride. The DOW was still at 11k when it was all paid off within 3 yrs so rough estimate, I escaped the 8% drop. On top of that I gained 3% paying back to myself. So instead of a loss, I gained 11% on the 20k I borrowed instead of paying 5% to the bank for a car loan. Is this voodoo math?

Voodoo no but a bit fuzzy. The 3% you paid back to yourself shouldn't be counted. Any earnings/losses on that 3% should be counted though. I took out a 401k loan to pay off my mortgage. In my case I kept a spreadsheet of all loan payments and tracked the opportunity cost of the loan (what I would have made on the money had I left it alone) and on each payment based on fund prices at the time of payment vs fund prices at the time of payoff. I ended up saving 1.1% as an annualized rate over the life of the loan. The market funds made money but less than the mortgage interest avoided so I came out a bit ahead. If the market had done a bit better I'd have lost money on the deal. When I took out the loan the market had just made its 60% run-up from the bottom so I felt comfortable that it wasn't going to move up much during the loan period.

I also cut the loan period by several years relative to the mortgage I paid off with the 401k loan and so saved more interest. However since I only know what the interest savings are but not the opportunity cost for those out years I can't calculate a net effect past the loan payout date.

 

[Lifted]

The question was never "is a 401k loan better then a bank loan?", the question is if a 401k loan is better then an early withdrawl.

Do that math then come back and tell me I'm wrong.

Again, NOT being tied to a loan is GREAT. Why force yourself to pay back a loan AFTER TAX when you can just increase your 401k and Roth contributions PRE TAX?

I'm more than willing to admit that I haven't sat down and done the math, and I may be off, but I don't see how that's possible.

 

[linuxboy]

Do that math then come back and tell me I'm wrong.

We did. We're all telling you you're wrong.

Again, NOT being tied to a loan is GREAT.

It's not being tied. In case of termination, you have to pay it in a lump sum, or treat the loan as a distribution. Now if retirement is really unimportant, and/or there are other funds available, then immediate withdrawal is a viable strategy, especially if you get lucky and market timing works in your favor.

 

[brianmanahan]

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.

if you survive till retirement age and didnt save any money, you sure will think you were a retard 40 years ago

 

[Lifted]

We did. We're all telling you you're wrong.

Show me numbers then. I don't see any.

It's not being tied.

Oh yeah?

In case of termination, you have to pay it in a lump sum, or treat the loan as a distribution.

OHHHH!! So now when somebody loses their job and can't make payments, the IRS comes along and says "Pay your taxes AND a 10% penalty on that $50,000 because it's a distribution. Oh, and your annual salary just got bumped from $60,000 to $110,000. Don't worry, no biggie. You just owe more between the taxes and penalty than you took home all year... good thing you weren't tied to it though!

😵

This all sounds MUCH better than my suggestion of maxing out your 401k and Roth, and not having that loan (and the IRS) hanging over your head. 😀