401k match vs 10% penalty for early withdrawl


D

Dancebert

I may retire early and may need to tap one of my 401k accounts before
59 1/2. I'm 50 and am trying to decide between continuing contributing
to my 401k to get the 25% match knowing I may have to pay a 10% penalty
vs. putting my savings into a taxable account. Yes I know about the
72(t) option, but haven't investigated that yet.

My employer matches my 401k contribution 25% for any size contribution.
The vesting schedule is 20% after the first year of employment, 40%
the next, etc, up to 100% after five years. I'm 40% vested. It seems
likely I'll stay here long enough to make it to 60%, beyond that is
uncertain, mostly due to forces beyond my control.

My naive calculations show that if I leave after 60% vesting, I'll come
out 3.5% ahead after paying the penalty, 8% after 80% vesting and 12.5%
when fully vested. These calculations assume no market change in the
value of the account.

I've got an estimated 5 years living expenses available in taxable
accounts, so the penalty issue is not critical. Because the investment
selections available in the 401k ranges from bad to pure crap and the
job future is murky at best I'm contributing 100% into a money market
fund. This particular 401k account is 4% of my total retirement
accounts. If I do retire early, the only income I'll be taxed on is
earnings from the accounts containing 5 years of living expenses.

I think I'm better off forgoing the match and investing in a taxable
account. What do ya'll think?

Thanks
 
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T

TB

I may retire early and may need to tap one of my 401k accounts before
59 1/2. I'm 50 and am trying to decide between continuing contributing
to my 401k to get the 25% match knowing I may have to pay a 10% penalty
vs. putting my savings into a taxable account. Yes I know about the
72(t) option, but haven't investigated that yet.
One detail there that might point to another answer...what do you mean
by "one of" my 401k accounts? How many do you have? Do you have any IRA
accounts?

-Tad
 
L

LT

Don't pay the penalty. If you need all the cash now, get a loan. Do the
72t, see this calculator.....
http://www.finance.cch.com/sohoApplets/Retire72T.asp
LT



I may retire early and may need to tap one of my 401k accounts before
59 1/2. I'm 50 and am trying to decide between continuing contributing
to my 401k to get the 25% match knowing I may have to pay a 10% penalty
vs. putting my savings into a taxable account. Yes I know about the
72(t) option, but haven't investigated that yet.

My employer matches my 401k contribution 25% for any size contribution.
The vesting schedule is 20% after the first year of employment, 40%
the next, etc, up to 100% after five years. I'm 40% vested. It seems
likely I'll stay here long enough to make it to 60%, beyond that is
uncertain, mostly due to forces beyond my control.

My naive calculations show that if I leave after 60% vesting, I'll come
out 3.5% ahead after paying the penalty, 8% after 80% vesting and 12.5%
when fully vested. These calculations assume no market change in the
value of the account.

I've got an estimated 5 years living expenses available in taxable
accounts, so the penalty issue is not critical. Because the investment
selections available in the 401k ranges from bad to pure crap and the
job future is murky at best I'm contributing 100% into a money market
fund. This particular 401k account is 4% of my total retirement
accounts. If I do retire early, the only income I'll be taxed on is
earnings from the accounts containing 5 years of living expenses.

I think I'm better off forgoing the match and investing in a taxable
account. What do ya'll think?

Thanks


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding.
 
B

BillLapworth

I don't need the cash now. I won't need it until after I retire. I
was under the impression that I can only take a loan from a 401k if one
is still employed at the firm.
 
B

BillLapworth

I have two accounts with former employers. One I left there because I
can buy load funds for zero load, the other is still there just so I
can be a burden on my former employer.

Obviously, I have an active 401k with my current employer.

I have three IRA accounts, one Roth, one rollover and one contributory
(I think that's what it's called)
 
N

noreplysoccer

will you be able to roll this 401k over to another account, possibly a
Roth IRA, and then use these fees 5 years from now? Note that
principle can be withdrawn from a Roth anytime, earnings must be in
account for 5 years. I would verify this with someone who does this
for living.
 
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T

Tad Borek

I have two accounts with former employers. One I left there because I
can buy load funds for zero load, the other is still there just so I
can be a burden on my former employer.

Obviously, I have an active 401k with my current employer.

I have three IRA accounts, one Roth, one rollover and one contributory
(I think that's what it's called)
Bill,
Sounds like you have a few options to consider and it's likely one will
let you avoid penalties, with some planning ahead. The basic question
here is the order you'll use when tapping into retirement savings, to
minimize (or hopefully avoid) penalties.

First, you should be able to make penalty-free withdrawals from your
current employer plan at 55 rather than 59 1/2, after you retire - as
long as you retire no earlier than age 55. This is an exception to the
59 1/2 rule and one of the advantages of a 401k over an IRA. Ask your
plan sponsor about it, might solve your issue entirely. Or google:
"NOTICE 87-13" and read all you can. Note that this wouldn't be
available for your old 401k accounts.

Next you mentioned you have a Roth IRA. That means you have some funds
that will be available to you before 59 1/2. Check the IRS publication
for rules on what you can take out of a Roth without paying penalties
(www.irs.gov). On the flip side I generally advise clients to preserve
Roth dollars as long as possible, because of the great tax benefits of
that account type.

Similar: you may have the option of adding to the Roth in the next few
years, both through contributions or conversion of your other IRAs, and
perhaps a rollover-then-conversion of your prior employer's 401k.
Conversions will create taxes at the time of conversion, perhaps at a
time when your earnings/tax bracket are peaking - which could very well
net out to higher taxes than just eating a penalty on some withdrawals.
And again, it violates the "leave your Roth alone" rule.

Next as you hinted there are provisions for taking early withdrawals
from qualified plans - the 72t thing. The IRS publication gives info
about that as well. There's quite a bit there to digest but in a
nutshell, you can begin tapping these assets early as long as you take
withdrawals for at least 5 years or until you hit 59 1/2, whichever is
later.

And of course you have five years to set aside additional savings that
doesn't sit in qualified accounts, so is accessible whenever you need
it. That can be in all sorts of places, of course - separate question.

So in combination it seems possible that you'll be able to provide for
your withdrawal needs...it's not as if all your money will be locked up
until 59 1/2. Of course it depends on the amounts in the accounts and
your income needs but there are at least a lot of accounts to tap into,
and all sorts of exceptions & whatnot to look into.

-Tad
 
B

BMS

Realize that the old one that you are leaving there for spite costs you in
plan expenses that diminishes returns.

Look to see if your current 401k will accept rollovers from the prior plans,
then it will be easier to do 72t and avoid problems when calculating RMD.
 
W

Will Trice

will you be able to roll this 401k over to another account, possibly a
Roth IRA, and then use these fees 5 years from now? Note that
principle can be withdrawn from a Roth anytime, earnings must be in
account for 5 years. I would verify this with someone who does this
for living.
Note that there are restrictions on the withdrawal of rollover
contributions from a Roth. Generally speaking, you must wait five years
from the conversion to withdraw the rollover principal penalty free.

-Will
 
D

Dancebert

The plan allows me to buy a class of shares with lower fees than I
could from outside the plan. That's the main reason I left it there,
but I also like burdening this particular former employer.
 
D

Dancebert

First, you should be able to make penalty-free withdrawals from your
current employer plan at 55 rather than 59 1/2, after you retire - as
long as you retire no earlier than age 55. This is an exception to the
Thanks! I had no idea this was possible.

Bill
 
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