UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Author: alaskarusss Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75890  
Subject: Retire before 401K Date: 1/11/2000 3:07 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Have a major impact question,
My 401K is on it's way to a nice return when I turn 59 1/2(35 now). I realize I could take money from 401K at 55, but the payments would be set forever? Sounds like inflation could hurt later on. Would like to reitre/work for myself prior to 55.
What do you think of borrowing $25K from my 401K and investing it in the stock market Foolishly? Non sheltered though.Then the government can't tell me when to retire. It would take me about 5 years to save enough to equal the $25K. Front load my stock port (about 10K now). My goal would be to live off the stock until I have access to my 401K. I would have to pay myself 10 1/2% to borrow my own money,but might be worth it. Jump start my stocks or wait for the 410K (Putnam mutual funds only).
Might cost now, but the pay off to retire early........
FISH ON,
AlaskaRusss
Print the post Back To Top
Author: dsteppel Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17653 of 75890
Subject: Re: Retire before 401K Date: 1/11/2000 3:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Read your 401K documentation carefully and you MIGHT find that when you quit being employed by your company, your 401K loan becomes immediately (or within a short time) due and payable. 401K loans are secured by the employer, not by the 401K servicer (e.g. Fidelity or Vanguard). From what I've seen, you can only take a loan against a 401K, not against an IRA that is a 401K rollover (which I think needs to be done within 60 days after your last day of employment in order to prevent IRS penalties).

I ran into a similar problem when I'd intended to use a 401K loan to pay for grad school, but I had to quit my job before starting my 2-year full time program. I would have had to pay back the loan in full before I even started the program! I ended up taking federal guaranteed student loans instead.

Just make sure you do the research before assuming you can do whatever you want with your 401K monies.

DJ


Print the post Back To Top
Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17655 of 75890
Subject: Re: Retire before 401K Date: 1/11/2000 3:36 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
alaskarusss wrote,

Have a major impact question,
My 401K is on it's way to a nice return when I turn 59 1/2(35 now). I realize I could take money from 401K at 55, but the payments would be set forever? Sounds like inflation could hurt later on. Would like to reitre/work for myself prior to 55.


You can withdraw any amount you want from a 401k (and stop the payments at any time) once you reach age 55.

If you wanted to retire before age 55, you'd have to use SEPP withdrawals to avoid the 10% penalty. These distributions would have to continue for a minimum of 5 years or until age 59 1/2, WHICHEVER IS LONGER.

In any event, your payments would not be set forever. What little inflation you might see over 5 or 10 years you could probably make up out of other "non-401k" accounts you own.

intercst


Print the post Back To Top
Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17658 of 75890
Subject: Re: Retire before 401K Date: 1/11/2000 4:35 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
alaskarusss wrote:

Have a major impact question,
My 401K is on it's way to a nice return when I turn 59 1/2(35 now). I realize I could take money from 401K at 55, but the payments would be set forever? Sounds like inflation could hurt later on. Would like to reitre/work for myself prior to 55.


intercst replied:

You can withdraw any amount you want from a 401k (and stop the payments at any time) once you reach age 55.

Alaskaruss may be talking about a restriction imposed not by the IRS, but rather by his employer and/or the administrator of the 401(k).

When I retired at age 55 last year, my 401(k) was with Fidelity. The information pamphlet from my employer described the options available to me, including Installment Payments. I have marked what I think are significant restrictions in bold:

"If you are eligible for a distribution from the Savings Plan because you retired or became disabled, or if you are the beneficiary of a Savings Plan account, you can choose to receive your distribution in a series of monthly, quarterly, semiannual or annual installments... You can choose to receive payments over a 2- to 20-year period... Once you start receiving periodic payments, you cannot stop or change the form of payment, except to receive a full lump-sum distribution from your account."

Not quite "forever", but the apparent lack of flexibility made an impression on me, too!

Phooley

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17661 of 75890
Subject: Re: Retire before 401K Date: 1/11/2000 6:51 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
phooley wrote,

Alaskaruss may be talking about a restriction imposed not by the IRS, but rather by his employer and/or the administrator of the 401(k).

You are quite correct. The ability to take penalty-free withdrawals from a 401k at age 55 requires the cooperation of your 401k administrator. That's one reason many folks rollover there money to any IRA and suffer the mild inconvenience of doing SEPPs.

intercst



Print the post Back To Top
Author: Gglass555 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17678 of 75890
Subject: Re: Retire before 401K Date: 1/12/2000 2:20 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Like "dsteppel" warned in his reply...be careful here. I work for a large company and my 401(k)/savings plan limits plan loan amounts to 1/2 the value of your plan up to a maximum of $50,000. The remaining 1/2 of your plan serves as "security" on your loan in the event you fail to make payments or if the becomes "due in full". If you terminate employment for any reason, a 401(k) loan immediately becomes due and if you are unable to pay-in-full, the remaining amount in your plan becomes payment to satisfy the loan. Also, should this occur, the IRS will consider this a "distribution" and you will be required to pay any applicable income tax! Only borrow against a 401(k) plan after you have exhausted ALL other resources!

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17710 of 75890
Subject: Re: Retire before 401K Date: 1/12/2000 1:51 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Gglass555: "Like "dsteppel" warned in his reply...be careful here. I work for a large company and my 401(k)/savings plan limits plan loan amounts to 1/2 the value of your plan up to a maximum of $50,000. The remaining 1/2 of your plan serves as "security" on your loan in the event you fail to make payments or if the becomes "due in full". If you terminate employment for any reason, a 401(k) loan immediately becomes due and if you are unable to pay-in-full, the remaining amount in your plan becomes payment to satisfy the loan. Also, should this occur, the IRS will consider this a "distribution" and you will be required to pay any applicable income tax! Only borrow against a 401(k) plan after you have exhausted ALL other resources!"

I agree with both steppel and Gglass555 about being careful. What sounded odd to me is Gglass555's description of his plan loan and the other 1/2 as security (and oviously, I have not read his/her plan documents). In the plans that I have seen (and admittedly not many), if the loan is not repaid, then the loan is treated as a distribution and taxes (and penalties, if applicable) are due ont his amount, but the balance that stayed in the plan is just fine and stays in the plan or is removed pursuant to the ussual rules. I have never heard of a plan that seizes an amount equal to the loan and treats both the loan and the amount seized as distributions.

Just my $0.02. Regards, JAFO


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17719 of 75890
Subject: Re: Retire before 401K Date: 1/12/2000 2:32 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I agree with both steppel and Gglass555 about being careful. What sounded odd to me is Gglass555's description of his plan loan and the other 1/2 as security (and oviously, I have not read his/her plan documents). In the plans that I have seen (and admittedly not many), if the loan is not repaid, then the loan is treated as a distribution and taxes (and penalties, if applicable) are due ont his amount, but the balance that stayed in the plan is just fine and stays in the plan or is removed pursuant to the ussual rules. I have never heard of a plan that seizes an amount equal to the loan and treats both the loan and the amount seized as distributions.

Actually a little clarity is required. Most of all of this is a partial regurgitation of IRC §72(p)(1)(A). Suprisingly, when you do take out a 401(k) loan, you can only borrow up to 1/2 your vested balance; because, most often (but not always), the other 1/2 which stays in the plan DOES act as security for the loan. Then, if you default the loan, what remains in the account pays off the prommisory note and the amount needed to extinguish the note is a "deemed distribution" to which taxes & penalties apply. I know these seems somewhat circular, but this how it happens.

Further, your remaining 1/2 in your 401(k) account does not have to be the security for note. You can, with a VERY cooperative plan administrator, supply a different security such as a mortgage on your residence. Then, should you default the note; guess what, the plan administrator can not use your remaining balance to close out the note; instead the PA has to commence foreclosure proceedings against the security (your home) to satisfy the note. I've been there & done that. However, as I said, it takes a very, very cooperative PA to impliment this strategy.

TheBadger




Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17724 of 75890
Subject: Re: Retire before 401K Date: 1/12/2000 3:54 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
The Badger: "Actually a little clarity is required. Most of all of this is a partial regurgitation of IRC §72(p)(1)(A). Suprisingly, when you do take out a 401(k) loan, you can only borrow up to 1/2 your vested balance; because, most often (but not always), the other 1/2 which stays in the plan DOES act as security for the loan. Then, if you default the loan, what remains in the account pays off the prommisory note and the amount needed to extinguish the note is a "deemed distribution" to which taxes & penalties apply. I know these seems somewhat circular, but this how it happens."

Happy to defer to The Badger regarding the details. It is definitely counter-intuitive to me, but I know better than to assume the the IRC is intuitive.

So long as there is only 1 deemed distribution that is taxed (i.e. no double dipping), then the result is consistent with my understanding and the method of getting there is largely irrelevant to me (so long as the IRS is content).

Regards, JAFO



Print the post Back To Top
Author: alaskarusss Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17725 of 75890
Subject: Re: Retire before 401K Date: 1/12/2000 4:01 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Read your 401K documentation carefully and you MIGHT find that when you quit being
employed by your company, your 401K loan becomes immediately (or within a short time)
due and payable. 401K loans are secured by the employer, not by the 401K servicer (e.g.
Fidelity or Vanguard). From what I've seen, you can only take a loan against a 401K, not
against an IRA that is a 401K rollover (which I think needs to be done within 60 days after
your last day of employment in order to prevent IRS penalties).

Thanks for the info!
I believe you can withraw funds from a 401K up to $50K
(50K or the amount you have actually put into the 401K,which ever is less) and pay yourself a 10 1/2% interest fee for the use of the money. Pretty nice deal, but not near enough to live on. I am contemplating a withdrawal for the purpose of reinvesting in a non tax sheltered account. Possibly front loading the stock market account and in 10-15 years living off some of the stocks until a full 401K retirement is available at 55. I think there might be a chance of making this happen if I front load the stocks with maybe 25-35K. The RB port used 50K and made over 800K in five years time. If I could start out with 35K and do the same in 15 years as they did in 5, I'm set.
Fish On,
AlaskaRusss

Print the post Back To Top
Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17856 of 75890
Subject: Re: Retire before 401K Date: 1/15/2000 10:55 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<<401(k)/savings plan limits plan loan amounts to 1/2 the value of your plan. The remaining 1/2 of your plan serves as "security" on your loan in the event you fail to make payments or if the becomes "due in full"....and if you are unable to pay-in-full, the remaining amount in your plan becomes payment to satisfy the loan.>>

Um, no. This is totally wrong.

The 1/2 limitation is because that's what the law says.

And the 401K plan doesn't care about being "paid-in-full". All the money in the plan is your money, so they don't worry about being "paid back".

If you terminate and don't pay it back in full immediately, it is deemed a distribution. This is what you don't want to happen!

Ray

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Advertisement