401K Question

[126coupe]

How am i taxed on 401K? If I wait till I am 60 to withdraw my 401K $ Am I taxed on the money as ordinary income?

[tsinger873]

Basically you are deferring paying the tax on the money invested in your 401k until you are 62.5 years old i believe. The money was taken from a paycheck pre-tax so the tax is paid as you withdraw it. If you take it early, there will be a 20% federal tax and a 10% penalty taken also. For proper advice, start with your 401k plan Document that is provided by your employer. Then an accountant if you are unsure.

[Porsche-O-Phile]

You can borrow against your 401k also for certain things.

[widgeon13]

Some exceptions that do not require penalty:

401k Withdrawal Exceptions

The following three exceptions also apply to 401k plans:

* Distributions or withdrawals made to you after termination of employment, if the separation from your employer occurred in or after the calendar year you reached age 55.
* Distributions of dividends from employee stock ownership plans.
* Distributions or withdrawals made to an alternate payee under a qualified domestic relations order. (This often happens as part of a divorce settlement.)

I know option (1) is available w/o penalty as I have discussed w/ a financial planner although have not taken from my own 401K.

Check w/ a financial planner or tax advisor you have confidence in!!

[MRM]

The short answer is yes. You put the money into your 401(k) pre-tax. It grows in the account without being taxed. Then, when you retire, all of the money you withdraw is taxed as ordinary income as you withdraw it.

The advantage is that you will probably have a lower tax rate when you are retired than you do now and you will be able to manage your income and taxes by withdrawing more or less as you need it. Of course you have some benefit of the investment returns not being taxed until you take it out, too.

[KFC911]

One can also avoid the 10% early withdrawal penalty by using a feature that's under the radar for most (and some professionals too ), called 72(t) (Substantually Equal Periodic Payments) before you reach retirement age. Search if you're not familiar...it can be a valuable tool imo.

[LakeCleElum]

Wow, so much bad information here, I don't know where to start???? There are many types of 401K plans now.

Go to an investment house for brochures or google it.......

[masraum]

Originally Posted by LakeCleElum

Wow, so much bad information here, I don't know where to start???? There are many types of 401K plans now.

Go to an investment house for brochures or google it.......

Well, if you're going to make a post like this you need to at least tell everyone specifically which info is bad.

[widgeon13]

Originally Posted by LakeCleElum

Wow, so much bad information here, I don't know where to start???? There are many types of 401K plans now.

Go to an investment house for brochures or google it.......

Wow, You must have spent last night at a Holiday Inn!

[widgeon13]

The statement below is from an IRS document so I am confident my post above is correct


If I retire or laid off before I am 59 1/2, can I withdraw the funds accumulated in a 401(k) plan, without having to pay a 10% penalty? What if I was 55 or older when I separated from service with my employer?
In most cases, if you withdraw funds from your 401(k) plan before you are 59 1/2, you must pay the 10 percent additional tax on early distributions from qualified retirement plans on any amounts that are not rolled into an IRA. However, there are some exceptions listed in Publication 560, Retirement Plans for Small Business, and Publication 575, Pension and Annuity Income. You would not have to pay the 10 percent additional tax, for example, if you received the distribution after you left the company and you left the company during or after the calendar year in which you reached age 55 and your departure from the company qualifies as a separation from service. Tax Topic 412 and Tax Topic 558 are available for further guidance.

[wcc]

Bad info. I don't know about that completely. But you can do a ONE time withdrawl for a house/business/school without penelty. Bad info? I don't know exactly, so I'd have to check it out to make sure. But I heard so.

I do know this though. If you HAVE to borrow against your 401k plan for something DO NOT BUY IT! That is the worst advice I've heard of. Save your money and pay for it in full, that's the best. If not, save your money and pay a large amount down then get a loan for the remainder and pay if off early if you have to.

[KFC911]

Originally Posted by LakeCleElum

Wow, so much bad information here, I don't know where to start???? There are many types of 401K plans now.

Go to an investment house for brochures or google it.......

Yes, please be specific as I reread the thread, and I don't see any inaccuracies either. POP's suggestion about borrowing would just be considered "bad advice" . I had a "professional advisor" almost steer me wrong in the very "early days" on a 401K rollover, so I try to stay up on the nuances, but there are a lot of new offerings as of late. Although there may be many types of 401k plans now, unlike the options available with individual IRAs, most would only have access to what their employer is offering (unless you are referring to setting up your own (self employed, etc.)). From what I have read over the years, most investment house brochures and websites only hit the tip of the iceberg, could you point me to a specific one that you've found to be informative? Thanks!

[Bill Verburg]

Originally Posted by Minkoff

How am i taxed on 401K? If I wait till I am 60 to withdraw my 401K $ Am I taxed on the money as ordinary income?

Yes, by both the state and federal govt as odinary earned income. No SS/Medicare tax though as that was paid on the way into the account.

If you retire or other wise separate from the plan provider you can roll the money over tax free into an IRA which gives you greater flexibility and fewer fees. Just don't take possession of the money your self, make sure it goes form one investment house to another. Most if not all will do all the leg work for free.

[Porsche-O-Phile]

Originally Posted by wcc

Bad info. I don't know about that completely. But you can do a ONE time withdrawl for a house/business/school without penelty. Bad info? I don't know exactly, so I'd have to check it out to make sure. But I heard so.

I do know this though. If you HAVE to borrow against your 401k plan for something DO NOT BUY IT! That is the worst advice I've heard of. Save your money and pay for it in full, that's the best. If not, save your money and pay a large amount down then get a loan for the remainder and pay if off early if you have to.

I guarantee when the time comes to buy a home I will be looking at doing exactly this. I see nothing wrong with it. The money in my 401k is MY money, not the government's money. Why shouldn't I tap it for something that will benefit me? It gets paid back over time (still tax-free) anyway.

You guys say "oh, just save up for a down payment" like it's nothing. Have you looked at the price of housing relative to income lately? I don't know if you guys are all multi-millionaires or what, but I'm not and as such, I need to consider (and use, where applicable) all tools at my disposal to get ahead in this world. I guess it'd be nice if I'd been born with a trust fund or whatever like some of you evidently were, but barring that I think it's only smart to at least explore the possibilities of tapping resources and making your money work for you, instead of sitting in some account working for a fund manager who's getting rich off it until I'm old, gray and miserable.

The amount necessary for a "decent" down payment is $50k-$100k these days. If you live like a pauper, max out your 401k, put the recommended amounts into savings and investments, etc. it typically leaves very little, if anything afterwards. And if you have kids, forget about it unless you're in the top 2% of wage earners in America. I'm talking about reality here for the majority of the population.

How much do you think an average 2-earner household that makes decent (but not exceptional) money, lives fairly modestly and makes all the recommended contributions to 401k/IRA, savings, investments, etc. can realistically save for a down payment - after taxes? No credit cards, no car payments, etc. Maybe somewhere on the order of $500 a month? $750 a month if they're lucky? Let's assume they can save $750 a month. That's $9,000 a year. That means a MINIMUM of five or six years to save up just for a down payment. Minimum. Any "less-than-ideal" factors will lengthen this time period.

Tell me why it's a good idea to automatically exclude low-or-no-interest borrowing against one's 401k again?

[MRM]

My wife and I bought our first house in 1993 after years of student debt and a year or two of wandering in the wilderness before becoming fully employed. We had no cash but were just starting to earn incomes. We bought a nice but modest four level split in a nice neighborhood with nice schools. We offered 3 points more than the asking price, had the buyer pay the closing costs, and borrowed $5,000 from my wife's then-tiny 401(k) for the 5% downpayment. Yep, the house cost just over $100,000. Our only mistake was not buying a $200,000 house in 1993.

[KFC911]

POP, you're fiscally astute, and I have no doubt that you will use "all" resources to your advantage . That being said imo, most folks should typically refrain from borrowing for a couple of reasons. First, the money you "borrow" is no longer working for you in a tax deferred shelter, while it's borrowed. (A friend once bragged about how he "borrowed" for a truck, and was paying the interest back to himself, but I didn't have the heart to point out what the return would have been had he not "borrowed" it.) Second, and a "biggie", is if you are terminated, etc. the "borrowed" amount will be due immediately or will be viewed by the IRS as a distribution (with taxes due), and that's not a pretty scenario for most to deal with along with everything else.

[MRM]

Oh, and to buy my 911 in 2000 we borrowed against my wife's 401(k) again. When the market crashed a year later and the value of her 401(k) went down 40% or so, the money taken out to by the Carrera was safely out of the market and was being repaid with interest. So I paid for my car with pre-crash stock and paid back the fund with post-crash dollars as the market was rising again. Sometimes you just get lucky.

[LakeCleElum]

Originally Posted by masraum

Well, if you're going to make a post like this you need to at least tell everyone specifically which info is bad.

Sorry about that, I'm sick and cranky. I didn't want to give advise, because I don't pretend to know all the answers. 2 reasons I made the comment:

1) My neighbor got some bum advise and thinks he has to exhaust his fund by ago 701/2, so he's taking out more than he needs now that he is 65. He got some bad advise and he's paying more tax than he should because he's drawing more than he wants to.

2) For years, there was basically on one type of 401(K), now there are many. The one my wife has can't be touched w/o penalty until she is 59 1/2. BUT, these is an exception under TAX Code 73 (TC 73)....I don't want to explain it here, as once again, those asking this question should get professions advise.

Additionally, I was a Gov't employee for 30 years and although many call my plan a 401(K), it's actually a 457(C)....I was allowed to withdraw w/o penalty when I retired at age 52 -

I think with any plan, you pay the tax that year on what you withdraw, so you spread it out.....IF you take 300K out all at once, it's like you made 300K + any other income that year. If you spread it out (I take 15K a year and my balance go up instead of down), you use it to supplement your retirement pay and pay tax only on an extra 15K a year.

So, once again, I'msorry for my previous post....

[wcc]

POP - Saving isn't 'nothing' it is HARD work. When graduated HS I was sent out in the world. I worked a couple years not getting anywhere. I then joined the Military and signed up for the GI Bill and saved, saved, and saved. Did I mention that I saved? Anyways, when I got out 4 years later I had enough from my savings and GI Bill to get through College (BSCE @ MSU). Then I started my career. But in the mean time I lived very reasonably while I continued to save here and there. When I met my wife and we bought our first house we had saved 10% down. Trust me it was no 50-100k but, to us, it was a lot of money. The bank saw that we were a good risk and they loaned us the money. Yes, we had to pay PMI insurance because we didn't have the 20% down like they wanted. We payed extra as we could and after a couple of years we re-financed showing we had more then the 20% equity to get rid of the PMI. Plus it was a lower interest rate so it was a win win for us. We are still in our first house with a plan to pay it off in less then 10yrs. Rich? I don't think so, we just don't live beyond my means. In the meantime I have a pretty good amount in my 401k because when I was single I maxed it out. Now that I have a family it doesn't get maxed out but it's still a pretty good amount. The wife maxes her 401k out. But everytime I get a raise I raise my contribution the same amount. I'll keep doing this until it's maxed out. I've heard over and over from all kinds of advisors it's not a good idea to borrow against it. I'm not a financial advisor so I can't tell you all the details. But I wouldn't do it IMO. I would save and adjust my lifestyle if need be.

[widgeon13]

It's unfortunate posts like this always escalate into pissing contests, guess that's the way it is on the internet.

This is a good post (question) and one that should be important to many people. From my perspective the 401K is on of the best savings and investment opportunities in modern time. It gives the opportunity to reduce AGI, in some cases get matching funds from your employer and accumulate interest, tax free. I suppose there are some downsides but they are very few.

What troubles me here is that if one can read, it is very simple to go to the IRS website (or other advice sites) and get many answers or at least a fundamental understanding of what is required of an individual (on all 401K issues). Just GOOGLE the freaking subject and there is more than enough information. While I find PPOT informative and entertaining, it's the last place in the world I'd come for financial advice.

Remember what they say about opinions, they're like *********S, everyone has one. No offense.

With SS and retirement funds being abused today the 401K is a vitally important retirement tool, think seriously before you do anything with it, check twice, the cost of a mistake is very significant. The more liberal the laws become regarding 401K's the more abused they will become as well, that just means more tax $$$.