Author Topic: 401k Company Match Hacking?  (Read 1634 times)

morethanconquerors

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401k Company Match Hacking?
« on: December 05, 2018, 07:33:04 AM »
This is a hypothetical question

;)

My question -- Is it possible to take advantage of a 401k company match to grow money immediately to use to pay off extremely high interest debt and/or jump start savings.

Part 1 -- Imagine there was a person who was in extreme debt and/or did not have any savings. Let's say their company matches 100% of 401k contributions up to 5% of their paycheck. Could that person put 5% into their 401k, receive the match and then immediately cash out? Before I get any further, is this even possible? Are you allowed to make 26 401k withdrawals per year? Is there a limit or any restrictions?

Part 2 -- If there are no legal restrictions to this plan, I'll continue. Let's say 5% is a $100 contribution per paycheck. With the employer match, this doubles to $200/paycheck. The person then immediately withdraws the money and pays $64 in fees and taxes (10% penalty on $200 + est 22% tax rate on $200), leaving them with $136. This is an automatic 36% gain that can be used to get rid of nasty debt or throw in an E-Fund.

Let me know what you think!



Cromacster

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Re: 401k Company Match Hacking?
« Reply #1 on: December 05, 2018, 07:38:51 AM »
It would depend on if your employers plan allowed in service withdrawls.  If they do, then yes this could be possible.

morethanconquerors

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Re: 401k Company Match Hacking?
« Reply #2 on: December 05, 2018, 08:13:08 AM »
It would depend on if your employers plan allowed in service withdrawls.  If they do, then yes this could be possible.

Thanks for bringing up that point. My company, for example, allows in service withdrawals. However, they cap them at 4 per year, so this would not be 100% possible.

Thank you!

YttriumNitrate

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Re: 401k Company Match Hacking?
« Reply #3 on: December 05, 2018, 01:02:32 PM »
Is there no vesting period on the match?

Dicey

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Re: 401k Company Match Hacking?
« Reply #4 on: December 05, 2018, 01:51:24 PM »
Is there no vesting period on the match?
Same question.

DS

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Re: 401k Company Match Hacking?
« Reply #5 on: December 05, 2018, 02:04:53 PM »
Not really a hack, just 401k withdrawal question.

And definitely not "jump starting" savings by taking an immediate 10% hit.

What interest rate that you can't get out of by refinancing would drive you to do such a thing? And certainly wouldn't be worth it to put into an e-fund... In that scenario if your 401k is your e-fund then you'd just leave it in until said emergency. Hopefully you aren't experiencing too many emergencies.

Proud Foot

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Re: 401k Company Match Hacking?
« Reply #6 on: December 05, 2018, 02:51:49 PM »
If you are wanting a hack for the match you would want to look at your vesting schedule and contribute for a year or two and then take out a 401k loan to pay off the high interest debt. No its not immediate but you do not get hit with income tax and 10% early withdrawal penalty. You also get the added benefit of not withdrawing your full vested balance so you still have investments in the market.

Boofinator

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Re: 401k Company Match Hacking?
« Reply #7 on: December 05, 2018, 03:09:05 PM »
Regardless of whether or not it is possible, I think you are asking the wrong question. The better question would be to ask what is the optimal solution given the specifics of your "hypothetical" situation. And to answer that question, I doubt the optimal solution is going to be the one you proposed.

robartsd

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Re: 401k Company Match Hacking?
« Reply #8 on: December 05, 2018, 04:16:55 PM »
I don't think the IRS allows this. While in service withdraw of additional voluntary contributions (the contributions you make after getting your match) are not blocked by IRS rules, the elective contribution and employer contributions are subject to the IRS hardship distribution rules and taking such a distribution bars you from making contributions for 6 months.

Bottom line - if you need the cash to make the minimum payments, you simply can't contribute to the retirement plan.

If the interest rate is high enough that it is better to pay off the loan before maximizing tax advantaged investments, refinancing with a 401k loan as Proud Foot suggests may be on the mathematically optimal path.

Stachless

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Re: 401k Company Match Hacking?
« Reply #9 on: December 05, 2018, 09:43:26 PM »
I did something similar many years ago - worked out well but was only cuz of lucky market timing!!

Quirky situation though as my company pays the match annually at the end of January for the prior year.  What I did was:

1) did some credit card 0% balance transfer check for $15k, which came with a 2% fee
2) used max (which was 75% of total comp) contribution for December and maxed out 401k at $15k ish
3) got company match in Jan - vested immediately
4) eventually took out a 401k loan (2.4% rate....with interest payable to myself) to pay off CC.  The loan did include of the just-earned company match, as it did vest right away

Moral of story:  Read the fine print on your 401k.  They all have lots of rules!

morethanconquerors

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Re: 401k Company Match Hacking?
« Reply #10 on: December 06, 2018, 04:23:50 AM »
Is there no vesting period on the match?
Same question.

Good point! This would obviously depend on the situation. My company used to have a two year vesting period, but recently changed to no vesting period at all.

morethanconquerors

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Re: 401k Company Match Hacking?
« Reply #11 on: December 06, 2018, 04:38:14 AM »
I don't think the IRS allows this. While in service withdraw of additional voluntary contributions (the contributions you make after getting your match) are not blocked by IRS rules, the elective contribution and employer contributions are subject to the IRS hardship distribution rules and taking such a distribution bars you from making contributions for 6 months.

Bottom line - if you need the cash to make the minimum payments, you simply can't contribute to the retirement plan.

If the interest rate is high enough that it is better to pay off the loan before maximizing tax advantaged investments, refinancing with a 401k loan as Proud Foot suggests may be on the mathematically optimal path.

Thanks for the link! That is very interesting that my employer does not mention anything about hardships in their 401k documents. Good points!
 
RE: the bottom line, wouldn't it be advantageous in a situation where someone could barely make the minimums to immediately get a 30% return on their money though? It might not be mathematically optimal, but it could help keep someone afloat?

Thanks for your thoughts!

morethanconquerors

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Re: 401k Company Match Hacking?
« Reply #12 on: December 06, 2018, 04:55:03 AM »
If you are wanting a hack for the match you would want to look at your vesting schedule and contribute for a year or two and then take out a 401k loan to pay off the high interest debt. No its not immediate but you do not get hit with income tax and 10% early withdrawal penalty. You also get the added benefit of not withdrawing your full vested balance so you still have investments in the market.

Thank you for your thoughts!! My only qualm is that someone would still have a monthly payment to pay back the loan. Sure, the math is probably in favor of a loan over a withdrawal.

morethanconquerors

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Re: 401k Company Match Hacking?
« Reply #13 on: December 06, 2018, 05:06:29 AM »
Thanks to everyone who has responded. What I was trying to propose isn't allowed it appears. I do still think that this is an interesting question. Obviously not good for any type of long-term planning, but imagine if a person had abysmal cash flow and could barely make ends meet. This person is obviously not prepared to make retirement contributions if they can hardly make the minimums on their loans. Therefore, I think a short-term approach is needed in this situation. Many employers offer a 401k match, so this becomes an easy option to get some extra cash. Again, this is a hypothetical question.



;)

jacoavluha

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Re: 401k Company Match Hacking?
« Reply #14 on: December 06, 2018, 09:11:01 AM »
Thanks to everyone who has responded. What I was trying to propose isn't allowed it appears. I do still think that this is an interesting question. Obviously not good for any type of long-term planning, but imagine if a person had abysmal cash flow and could barely make ends meet. This person is obviously not prepared to make retirement contributions if they can hardly make the minimums on their loans. Therefore, I think a short-term approach is needed in this situation. Many employers offer a 401k match, so this becomes an easy option to get some extra cash. Again, this is a hypothetical question.



;)
actually this doesn't generate extra cash in hand. You have to defer salary to get any match. So even if you could withdraw the employer contribution from the plan immediately, you have no net gain, because you had to defer salary, which of course lowers your paycheck.

A better short term alternative but still a poor plan would be to eliminate all retirement plan contributions and also adjust one's W4 to minimize or eliminate paycheck tax withholding. You're basically borrowing from the government in the form of delaying paying your tax liability.

If you continued this until tax filing, you would owe penalty and interest. But you could always re-adjust withholding near the very end of the year to meet the safe harbor and not incur penalty.

robartsd

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Re: 401k Company Match Hacking?
« Reply #15 on: December 06, 2018, 10:51:47 AM »
RE: the bottom line, wouldn't it be advantageous in a situation where someone could barely make the minimums to immediately get a 30% return on their money though? It might not be mathematically optimal, but it could help keep someone afloat?
If it were possible to get the 30% boost, it would be nice; however, as I interpret the IRS info I linked to, it would be available only once every 6 months or so. That assumes that 1) company match is deposited at the same time as employee contribution (some plans don't) and 2) validating the financial hardship doesn't delay the withdraw.