Cashing out 401k

[Monkey stache]

I lost my job due to the pandemic this year and the CARE act allows me to cash out my 401k by the end of the year without the 10% penalty. Normally I wouldn't do this but it seems like I can do it without paying a cent of taxes or penalties but I wanted to confirm first.

From my understanding, it's treated as ordinary income but I live abroad and qualify for FEIE. My 401k is only $5,500 and my income was $33k. The FEIE only requires me to pay taxes on income over ~$100k. Based on that, it wouldn't be taxed right? I'm filing single, 1 income, no dependents, no write offs or anything complicated so I'll just be claiming the standard deduction.

You're probably wondering why I just wouldn't roll this over to an IRA. My vangaurd account is just a brokerage account (index funds) because I had no need to reduce my income taxes because I don't pay any since I live abroad and made less than ~$100k. I just don't see the point of putting my money into an account that locks the funds until I'm 59.5 if I don't receive any benefit. So I'd be cashing out my 401k and putting it in my vangaurd brokerage account so I'm not limited on when I can withdrawal.

Is everything correct and make sense?

[seattlecyclone]

I lost my job due to the pandemic this year and the CARE act allows me to cash out my 401k by the end of the year without the 10% penalty. Normally I wouldn't do this but it seems like I can do it without paying a cent of taxes or penalties but I wanted to confirm first.

From my understanding, it's treated as ordinary income but I live abroad and qualify for FEIE. My 401k is only $5,500 and my income was $33k. The FEIE only requires me to pay taxes on income over ~$100k. Based on that, it wouldn't be taxed right? I'm filing single, 1 income, no dependents, no write offs or anything complicated so I'll just be claiming the standard deduction.

The 401(k) withdrawal won't be excluded under FEIE, but if the rest of your income is then it's likely you still wouldn't be taxed on it due to the standard deduction. Also look into whatever taxes may be imposed by your local jurisdiction.

I just don't see the point of putting my money into an account that locks the funds until I'm 59.5 if I don't receive any benefit.

Have you read the post about how retirement accounts aren't actually locked up until you turn 59½? A Roth conversion might make a lot of sense in your situation. If you move the money to a taxable brokerage account instead you'll be taxed on the dividends even if you don't touch the principal for a while. Whatever you do, make sure to look into how your current tax home will treat it. I've read that many countries don't really believe in Roth IRAs. From that perspective you may find it most useful to just leave the money where it is, or move it to a traditional IRA if you don't like your 401(k) fund options.

[terran]

The first E in FEIE is "Earned" meaning it only applies to earned income, not investment income or 401(k) distributions. I could be wrong (maybe @seattlecyclone knows something I don't), but I'm pretty sure other income is taxed as if the FEIE income wasn't excluded, so you'd only avoid tax if your total income (including the FEIE excluded income) is below the standard deduction.

[seattlecyclone]

Sorry, I'm not familiar with all the minutiae of the FEIE. What @terran says about the total income counting for the taxation of non-excluded income could well be true.

[PDXTabs]

Is everything correct and make sense?

It makes sense to me that if you uses your FEIE to exclude all of you salary that you should pay 0% tax to cash out your 401k, which seems like a good plan, even if you just put it into a Roth IRA. Although I'm not sure that you would be allow to contribute to a Roth IRA because I don't know the nuances of foreign earned income.

[aak7v7]

The amount you withdrawal from the 401k can be spread out over three years also.
That may not help you, but is a thought for those who are considering withdrawaling a larger sum.

[terran]

Sorry, I'm not familiar with all the minutiae of the FEIE. What @terran says about the total income counting for the taxation of non-excluded income could well be true.

No worries, I'm not super familiar with it either other than as an interested observer. I think this is probably where I saw that other income is calculated as if the excluded income were taxable: https://www.gocurrycracker.com/feie-and-capital-gain-harvesting/. It's about capital gains rather than 401(k) distributions, but I suspect the same is true. That blog has lots of good tax nerd information, especially as it relates to US citizens living abroad.

[Monkey stache]

Thanks for all the advice!

To answer some questions:

The country I live in now does not tax any income or investments in the US. I lived abroad last year I made $56k and included interest from a CD and dividends from my Vanguard brokerage account and was not taxed on either.