Author Topic: 401k - Would you raid yours?  (Read 9754 times)

momo

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401k - Would you raid yours?
« on: January 23, 2013, 01:31:36 PM »
Would you raid your 401k due to hardships? Have you done it or known someone who has? Share your experiences and the pros and cons. Looking to learn from everyone.

Two interesting articles raise some interesting points.
http://www.forbes.com/sites/nextavenue/2013/01/16/maybe-you-shouldnt-invest-in-a-401k-after-all/

http://articles.washingtonpost.com/2013-01-14/business/36343600_1_retirement-savings-retirement-security-retirement-funds

What do you think? Looking forward to hearing your ideas!

Cheers!
« Last Edit: January 23, 2013, 01:34:17 PM by Stashtastic Momo »

James

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Re: 401k - Would you raid yours?
« Reply #1 on: January 23, 2013, 01:41:18 PM »
Absolutely I would, but my definition of hardship and the definition of 99% of those people draining their 401k accounts is radically different...  :)

I would even drain my 401k account to fund something more valuable than keeping it in the account (after accounting for penalties, taxes, etc), but the likelihood of that is extremely remote.

Do you have a specific situation you are considering the question for?

momo

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Re: 401k - Would you raid yours?
« Reply #2 on: January 23, 2013, 01:50:17 PM »
Thanks James. I just want to learn from others how, when, and why they might consider or have already raided their own 401k account(s). Everyone has an opinion about borrowing from their 401k, or a story or two about someone who has touched their 401k. 

The two articles shed eye raising findings which I hope other will interesting too.

Personally, I have zero intention to raid the 401k. These are specific tax structured plans that I intend to maximize for early retirement as long as I work in Wall Street. I want to learn from others on everything financially related; to me, these are good life lessons which I do not want to overlook.

Cheers!

adam

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Re: 401k - Would you raid yours?
« Reply #3 on: January 23, 2013, 01:54:34 PM »
I already did, BUT

I don't have a 401k exactly, I have a TSP.
I didn't just take money out and pay taxes and penalties, I took out a "loan" from myself for 1.375% when my 12 month performance was less than 0% return.
I make payments on that "loan" that go back into my TSP balance. (The payments are not tax deferred, but I didn't pay taxes on the money in the first place)

Was it the right choice?  Well, I don't know, I wouldn't suggest anyone else do it unless they think long and hard about it and decide it is right for them as well.  I do not regret the decision.

momo

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Re: 401k - Would you raid yours?
« Reply #4 on: January 23, 2013, 01:57:04 PM »
Thanks adam for sharing. If you don't mind sharing more can you elaborate more on the TSP? What is it? Are there significant tax structuring differences? Were there retrictions for withdrawal? Thanks!

adam

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Re: 401k - Would you raid yours?
« Reply #5 on: January 23, 2013, 01:59:30 PM »
The TSP is a 401K for federal employees and military members.  It is pretty much just a 401k with a few tweaks.

DaftShadow

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Re: 401k - Would you raid yours?
« Reply #6 on: January 23, 2013, 06:04:16 PM »
Some things to consider when doing your math: 
  • Even if total income is low, you will probably pay normal income tax on much of it.  If the 401(k) is your only income for the year then you won't get things like the Earned Income Tax Credit to offset more than the standard deduction.  Unless there are other things to offset this (married filing jointly, worked for 1/4 of the year with horrible pay, etc.), keep this in mind.
  • Penalties apply no matter what your income!  10% must be payed. 
  • Some states, such as California, also require you to pay them a penalty too!  Look this up (e.g. California is 2-4%, depending on income lvl)

Of course, that's just the math.  It's also important to consider your future.  There's a saying in finance:  "never lose your principal."  Your principal, the cash you have invested, is literally going to the office every day and WORKING so you don't have to.  The more of them you can collect, the less work you need to physically do in order to trade time for money, and the freer you become... 

If you take them out of the office and spend them on things, they stop making you money... 

So if you can find any way to supplement your income (e.g. working odd jobs in the morning while looking for work in the evenings (or vice-versa... lots of bars have odd jobs...)), then you will keep that principal in there making you money, while you also add money on the side...

Obviously there are always mitigating factors.  For example, if you are living exceptionally frugally, then it will be able to last you a long time, and amount you lose in penalties will be more than made up for by the longer time-horizon you have to focus on your current task.  But if there's a second car, 1+ night a week out to dinner for convenience, multiple smartphone plans, a small city-trip next month because you *just need* the R&R...  then pulling out the money could be shooting yourself in the foot.

Full disclosure:  I raided my 401(k) when I was younger.  Possibly the best (and worst!) financial decision of my life.  Best, because the investment in time meant a chance to meet the woman I've been in love with ever since.  Worst, because I was wasteful with my spending then...  if I had instead tried to do side work during the time off, then I would have found myself still 1/3 to FI and ready to buy a house the instant I got back to work... 

Ultimately, raiding your 401(k) isn't so much about how much you pay in taxes, but whether or not it's worth it to stop using that money to make money. You spent years collecting those dollars here and there, scrounging to save a tiny bit each month...  once they disappear, it's much harder to replenish than you think... 

~ DaftShadow
« Last Edit: January 23, 2013, 06:14:34 PM by DaftShadow »

JohnGalt

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Re: 401k - Would you raid yours?
« Reply #7 on: January 23, 2013, 07:38:14 PM »
One of the many things that attracted me to the ERE/MMM principals wasn't just the idea that you could save a bunch of money to retire early but that you could save a bunch of money and keep spending low so that you can be flexible if the right opportunity (investment, life experience, whatever) comes along.  I'm on constant lookout for that right opportunity.  If it comes along and I need to raid the 401k to get in on it, I'll do it without looking back. 

Forcus

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Re: 401k - Would you raid yours?
« Reply #8 on: January 23, 2013, 07:48:03 PM »
Does borrowing against it count?

tkaraszewski

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Re: 401k - Would you raid yours?
« Reply #9 on: January 23, 2013, 07:50:27 PM »
My wife is dying of cancer. When she passes I will probably raid my IRA (I rolled over all of my funds from a previous 401k) to help me start over (mostly move to a smaller house).

badassprof

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Re: 401k - Would you raid yours?
« Reply #10 on: January 23, 2013, 07:59:31 PM »
tkaraszewski,
I am very sorry to hear about your wife. My thoughts are with you and your family.

Another Reader

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Re: 401k - Would you raid yours?
« Reply #11 on: January 23, 2013, 07:59:51 PM »
It was not that long ago you were posting about selling your house in Corralitos and moving to Scotts Valley.  I wondered why you had stopped posting.  I'm so sorry things worked out this way.  I wish you and your family the best in this very difficult time.

Skyn_Flynt

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Re: 401k - Would you raid yours?
« Reply #12 on: January 23, 2013, 08:01:40 PM »
Does borrowing against it count?
I would say yes, unless it's the kind of plan where the interest on the funds borrowed is paid back into your own 401k.

Irishmam

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Re: 401k - Would you raid yours?
« Reply #13 on: January 23, 2013, 08:14:26 PM »
My wife is dying of cancer. When she passes I will probably raid my IRA (I rolled over all of my funds from a previous 401k) to help me start over (mostly move to a smaller house).
Your comment puts it all in perspective. Our thoughts and prayers are with you and your wife during this difficult time.

tkaraszewski

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Re: 401k - Would you raid yours?
« Reply #14 on: January 23, 2013, 09:15:15 PM »
Thanks for your concern everyone. My wife was diagnosed with metastasized colon cancer (aka, stage 4 colon cancer) a couple months ago, and it's been aggressive and unresponsive to chemotherapy. She starts hospice care this Friday, and her doctors estimate she has about three months left.

This has, unsurprisingly, had a big financial impact (to say the least) on our family - we have a 17-month-old daughter, for whom my wife was the primary caretaker. Now we've had to hire child care (which is extremely expensive) to watch her while I attempt to care for my wife and work.

It is cathartic in a way for me to come up with a sound strategy, financially, for what to do next. It gives me a little bit of a sense of control and security. It's why I've considered things like liquidating my IRA. My plan as it stands is to sell our big semi-rural house (worth maybe $600k, and I owe $527k on it) and rent for a little while, maybe 6-12 months, while I try to save enough for 20% down on a townhouse (which I can probably buy for about $350k) in a more central location. This is why I'd liquidate the IRA, I don't think I can come up with enough down to get into a place in a short timeframe otherwise. I could rent for a few more years, but honestly I'd rather buy a place quickly and start over on the IRA (I'm 31, I have a lot of time left to build retirement savings). We had planned on being a family of four or five with a mom at home to watch the kids, so the big house in the country was a decent choice for that, but now we'll be a family of two that will benefit greatly from being close to things like schools and daycare. And having a mortgage of about $280k will be much more affordable than my current mortgage of $527k, which will make the cost of child care more bearable, as well as making it easier to pay off the townhouse.

And yes, maybe I'll re-marry and have more kids and want a bigger place in a few years, but even if I do, a centrally located townhouse would be the easiest place in the world to rent, and I'd like to have some sort of paid-off property as a fallback option in case I ever need it. Nothing lowers your monthly expenses like not having rent or a mortgage payment.

Sorry to be a downer in this thread, but it was pertinent to something I'd been thinking about lately. I appreciate everyone's thoughts and prayers.


lhamo

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Re: 401k - Would you raid yours?
« Reply #15 on: January 24, 2013, 04:26:35 AM »
Tyler,

I have really enjoyed your posts here and on GRS, and am so sorry to hear about your wife.

If you haven't already, you might want to talk with someone at the Social Security office about what kind of survivor benefits you and your daughter may qualify for based on your wife's work record.  If she didn't have many years in the workforce before staying home it might not be much, but there should be at least something. 

If I remember correctly you recently changed jobs, but you also should talk to HR about possible FMLA leave.  I can't believe any decent company wouldn't be willing to be flexible with a good employee (even a new one) in a situation like this.

I hope you and your daughter are blessed with some good times and good memories with your wife during this challenging and painful time. 

lhamo

Forcus

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Re: 401k - Would you raid yours?
« Reply #16 on: January 24, 2013, 07:22:15 AM »
Suddenly, my issues don't seem so bad. Very sorry to hear about your wife.

tooqk4u22

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Re: 401k - Would you raid yours?
« Reply #17 on: January 24, 2013, 07:34:21 AM »
Suddenly, my issues don't seem so bad. Very sorry to hear about your wife.

Seconded.  I can't possibly imagine and feel for you.

In addition to checking with social security, if she has life insurance you can likely get that prior to help defray costs while you take care of your wife.

arebelspy

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Re: 401k - Would you raid yours?
« Reply #18 on: January 24, 2013, 07:41:10 AM »
I agree with James and JohnGalt.  I wouldn't raid it except in very rare cases where it absolutely made sense to do so (taking all costs into account).

My wife was diagnosed with metastasized colon cancer (aka, stage 4 colon cancer) a couple months ago, and it's been aggressive and unresponsive to chemotherapy.

I'm sorry to hear that.  My thoughts are with you, your wife, and daughter.

I have heard the best thing to do is not to make any major life changes for a year while you deal with the grief and try to find stability.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
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Another Reader

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Re: 401k - Would you raid yours?
« Reply #19 on: January 24, 2013, 08:54:26 AM »
This is a case where selling the house quickly and moving closer to the job will likely be better for your family.  Renting short term is fine as a transition.  It's going to be an extremely difficult time, especially for your little girl.  Based on what my friends that lost their mothers at an early age have said, it's important to create as many connections between mother and daughter as you can.  Photos, videos, keeping possessions mom valued for your daughter will all be important to her as she grows up.  Grandparents living locally will also help preserve the connection.

Worry about where the money for the next house will come from when you are closer to needing it.  With your earning ability, you and your daughter will be just fine financially.

James

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Re: 401k - Would you raid yours?
« Reply #20 on: January 24, 2013, 09:09:38 AM »
I have heard the best thing to do is not to make any major life changes for a year while you deal with the grief and try to find stability.

Very sorry to hear about your wife, our thoughts are with you.

I would agree with this, stability is important for yourself and your daughter.  Be very careful of any moves during your recovery from this ordeal.  I wouldn't second guess your actions, you are in the best position of determining what is right, just a word of caution.

Forcus

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Re: 401k - Would you raid yours?
« Reply #21 on: January 24, 2013, 09:18:36 AM »
On raiding the 401k, I have borrowed twice. This was pre-MMM. I am neutral on the subject. I think if you use it in a conscious, strategic way, it could be beneficial. If you use it as a personal piggy bank, then definitely negative. I remember not too long ago the loans were called "hardship" loans in my 401k plan. Now they are just "general purpose" and "residential". I think they are actively trying to reduce the stigma for people who want to take loans out - for good or bad. From what I gather, a lot of people around me borrow from their 401k, but no one talks about it. That leads me to believe people are borrowing against their 401k for cars, trips, weddings, etc., instead of for investment purposes.

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Re: 401k - Would you raid yours?
« Reply #22 on: January 24, 2013, 09:54:59 AM »
tkaraszewski - I too am so sorry to hear about your wife.  I found hospice exceedingly helpful to our family when we needed it - very supportive and it made all the difference in our ability to cope.  I hope the same for you.

SwordGuy

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Re: 401k - Would you raid yours?
« Reply #23 on: January 24, 2013, 10:17:23 AM »
Took out a $6,000 401k loan years ago to buy the high end pc I needed in order to run some particular software on.  Used it to write a book and publish conference papers about the software. 

Basically, I paid myself interest on the loan, made $10,000 royalties on the book, got a $10,000 raise when the book went to the publisher and another $10,000 raise when it was in print.  That endeavor opened up a lot of career opportunities, too.

All told, I made about $300,000 in increased salary or royalties directly attributable to those activities, plus got to visit England twice, plus Canada, Turkey and Ethiopia.   Plus I didn't have to put up with as much dreck as other folks in my field for many years. :)

All told, it was a great investment of my time and money.

Jack

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Re: 401k - Would you raid yours?
« Reply #24 on: January 24, 2013, 11:19:16 AM »
If you were Hell-bent on withdrawing from your 401k, couldn't you save yourself the 10% penalty fee by rolling it over to a Roth IRA first? If that's possible, then withdrawing from a 401k seems stupid in all cases except where you're at the edge of a tax bracket and the rollover would push up your marginal rate 10% or more.

Jamesqf

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Re: 401k - Would you raid yours?
« Reply #25 on: January 24, 2013, 11:46:13 AM »
Took out a $6,000 401k loan years ago to buy the high end pc I needed in order to run some particular software on.

Is a loan (which you intend to pay back) really raiding one's 401K, though?  I took a loan from mine to help buy my first house, years ago (when mortgage rates were 7%+).  The interest I paid went to me instead of a bank, I got a better rate on the non-401K mortgage and didn't have to pay PMI, and I got a house which I eventually sold at a decent profit.

momo

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Re: 401k - Would you raid yours?
« Reply #26 on: January 24, 2013, 01:09:34 PM »
@ tkaraszewski: I am deeply sorry for the hardships you are experiencing. I wish you and your family the best of health and peace in these trying times. I agree with arebelspy and do your best to avoid making to the extent possible any major decisions. 

Also recommend using hospice and respite care, both are helpful. Using respite care in particular was a godsend when my father had massive heart surgery complications. Do try to take care of yourself too tkaraszewski.

momo

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Re: 401k - Would you raid yours?
« Reply #27 on: January 24, 2013, 01:12:02 PM »
On raiding the 401k, I have borrowed twice. This was pre-MMM. I am neutral on the subject. I think if you use it in a conscious, strategic way, it could be beneficial. If you use it as a personal piggy bank, then definitely negative. I remember not too long ago the loans were called "hardship" loans in my 401k plan. Now they are just "general purpose" and "residential". I think they are actively trying to reduce the stigma for people who want to take loans out - for good or bad. From what I gather, a lot of people around me borrow from their 401k, but no one talks about it. That leads me to believe people are borrowing against their 401k for cars, trips, weddings, etc., instead of for investment purposes.

Those are exactly some reasons why people raid their 401ks as reported in the article links I shared in the original post. It is frightening to consider the consequences if more people did this and neglected to replenish their contributions.

bdub

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Re: 401k - Would you raid yours?
« Reply #28 on: January 25, 2013, 09:48:23 PM »
My wife is dying of cancer. When she passes I will probably raid my IRA (I rolled over all of my funds from a previous 401k) to help me start over (mostly move to a smaller house).

I am so sorry to hear this, Tyler.  God bless.

joshuakennon

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Re: 401k - Would you raid yours?
« Reply #29 on: January 27, 2013, 05:17:47 PM »
1. If a family member (spouse, child) were dying of cancer or some treatable medical disease, I don't care if I had to bankrupt myself, I'd save them.

2. Otherwise, no.  Part of this is my age and part of it is the ability to later use funds in a 401(k) to rollover into something known as a self-directed IRA.  For example, I might be willing to wait until I was older and then buy an entire apartment complex, collecting the rent completely tax-free, generating far higher yields on capital.  It's tricky - you have to worry about things like the Unrelated Business Income Tax, meaning you can't introduce debt capital, but I had debt, anyway, so it's not that big of a restriction given how conservatively I operate.

momo

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Re: 401k - Would you raid yours?
« Reply #30 on: February 04, 2013, 01:47:06 PM »
joshuakennon: Agreed. Using the 401k to treat life altering illness like emergency medical treatments make sense. Have you raided your 401k already or known someone who has? In your experience have people paid it back?

Not paying 401k loans is one of the #1 reasons reported here:
http://www.forbes.com/sites/nextavenue/2013/01/16/maybe-you-shouldnt-invest-in-a-401k-after-all/ and
http://articles.washingtonpost.com/2013-01-14/business/36343600_1_retirement-savings-retirement-security-retirement-funds

It's also somewhat sad a family has this situation as posted in another thread http://www.freemoneyfinance.com/2013/01/help-a-reader-withdraw-401k-to-pay-off-debts.html#comments


momo

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Re: 401k - Would you raid yours?
« Reply #31 on: February 08, 2013, 04:13:21 PM »
Has anyone read the following article?

Rethinking Savings Plans as Americans Raid 401(k)s
http://www.cnbc.com/id/100436498