Comments on: New Consumer Funding Source: 401(k)s http://www.nakedcapitalism.com/2007/10/new-consumer-funding-source-401ks.html Sun, 22 Nov 2009 07:56:24 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: EEngineer http://www.nakedcapitalism.com/2007/10/new-consumer-funding-source-401ks.html#comment-1007 EEngineer Sat, 06 Oct 2007 17:12:00 +0000 http://www.nakedcapitalism.com/2007/10/new-consumer-funding-source-401ks/#comment-1007 Tapping a 401K early is usually a loosing proposition. But consider the following: If you make above the $90K limit for social security, any withdrawal is not going to get that additional tax of 6%, just the 10% penalty and the standard income tax rate. So that's only 4% plus the differential between present income tax rate and the anticipated future tax rate. The general assumption is that the tax rate in retirement will be lower due to the progressively lower tax rates on lower income. But tax rates right now are quite low and the huge deficits portend higher future tax rates across the board. This means that there might be a case for those in the $90K to low $100Kish range to cash out now, or at least that the hit won't as bad as it might first appear to be.<br/><br/> Another problem is that many 401K plans have limited or poor choices, low yields, and non existent oversight (MBS funds anyone?). On top of that, if you happen to think that the equity markets have become something between a large casino and a ponsi scheme, it might prompt one to want to exit the market. If you think that the market is going to tank, or that inflation is going to erase it's value, why not cash out and invest it in some tangible asset or income producing investment? When your money is in a 401K you really have little flexibility.<br/><br/> Another quirk is employer matches. If you have a large match like 50 cents on the dollar, it might make sense to max it out and cash it out at vesting. It would almost be like putting some of your pay in short term, high yield (and high fee) paper.<br/><br/> I haven't done any of the above, but they seem like interesting spreadsheet exercises. Tapping a 401K early is usually a loosing proposition. But consider the following: If you make above the $90K limit for social security, any withdrawal is not going to get that additional tax of 6%, just the 10% penalty and the standard income tax rate. So that’s only 4% plus the differential between present income tax rate and the anticipated future tax rate. The general assumption is that the tax rate in retirement will be lower due to the progressively lower tax rates on lower income. But tax rates right now are quite low and the huge deficits portend higher future tax rates across the board. This means that there might be a case for those in the $90K to low $100Kish range to cash out now, or at least that the hit won’t as bad as it might first appear to be.

Another problem is that many 401K plans have limited or poor choices, low yields, and non existent oversight (MBS funds anyone?). On top of that, if you happen to think that the equity markets have become something between a large casino and a ponsi scheme, it might prompt one to want to exit the market. If you think that the market is going to tank, or that inflation is going to erase it’s value, why not cash out and invest it in some tangible asset or income producing investment? When your money is in a 401K you really have little flexibility.

Another quirk is employer matches. If you have a large match like 50 cents on the dollar, it might make sense to max it out and cash it out at vesting. It would almost be like putting some of your pay in short term, high yield (and high fee) paper.

I haven’t done any of the above, but they seem like interesting spreadsheet exercises.

]]> By: BJ99 http://www.nakedcapitalism.com/2007/10/new-consumer-funding-source-401ks.html#comment-1006 BJ99 Sat, 06 Oct 2007 09:25:00 +0000 http://www.nakedcapitalism.com/2007/10/new-consumer-funding-source-401ks/#comment-1006 I doubt people are borrowing from 401k's for whimsy purchases. I would suspect that if they are doing so, it is to meet mortgage or medical payments.<br/><br/>I was out of work a few years ago for nearly 18 months and had to tap into my IRA to the tune of nearly 25k. I couldn't pay the taxes when they came due (after two extensions) and had to go on an IRS payment plan. I was employed again by that time but it took me another year to pay the IRS off. With penalties, I think the bill was nearly 6k. Not good. I doubt people are borrowing from 401k’s for whimsy purchases. I would suspect that if they are doing so, it is to meet mortgage or medical payments.

I was out of work a few years ago for nearly 18 months and had to tap into my IRA to the tune of nearly 25k. I couldn’t pay the taxes when they came due (after two extensions) and had to go on an IRS payment plan. I was employed again by that time but it took me another year to pay the IRS off. With penalties, I think the bill was nearly 6k. Not good.

]]>