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DPChallenge Forums >> General Discussion >> any lawyers or IRS people here?
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05/12/2006 06:31:58 PM · #1
How do I get my hard-earned money out of a 401(k)? These idiots at Ameriprise are telling me I can't get it no way no how, it's an IRS rule.

So basically I have money that I earned that I can't touch that someone else is investing however they want making money off of a loan from me.

--

Regardless of what I want to do with the money (maybe I want to go buy a bunch of shoes, or big rig filled with condoms, or maybe I want to invest it or need to for other things, that doesn't matter) -- I just don't see how I'm not allowed to get my money that I earned until I'm 59 1/2.

Anyway, anyone know of anything I can do to get my money?
05/12/2006 06:35:02 PM · #2
Originally posted by deapee:

How do I get my hard-earned money out of a 401(k)? These idiots at Ameriprise are telling me I can't get it no way no how, it's an IRS rule.

So basically I have money that I earned that I can't touch that someone else is investing however they want making money off of a loan from me.

--

Regardless of what I want to do with the money (maybe I want to go buy a bunch of shoes, or big rig filled with condoms, or maybe I want to invest it or need to for other things, that doesn't matter) -- I just don't see how I'm not allowed to get my money that I earned until I'm 59 1/2.

Anyway, anyone know of anything I can do to get my money?


I don't know, but I do know there is a certain obscure type of 401K that, no, you cannot touch no way no how. I have a co-worker who is very frustrated by that with a 401K from an old job.
05/12/2006 06:35:56 PM · #3
Normally you can cash out your 401K but you will be taxed plus a 10% penalty unless it falls under a couple of qualifying circumstances. I have cashed in a couple of small ones and the tax and penalties hurt.

Do you still work for the company that you invested with? The company I work for, I can stop contributing, but cannot withdraw, close the account until I am no longer an employee.
05/12/2006 06:36:33 PM · #4
You haven't paid taxes on that money yet. You're saving it for retirement.

Some consider this to be unwise, as the tax rate when you retire may be higher than it is now. (Conversely, it may be lower.)

Anyhow, to withdraw the money, you would have to pay the taxes on it, and pay a substancial (~20%?) penalty on it.

You can borrow aginst it, and pay yourself the interest, but for a variety of reasons that I don't fully understand, this is generally frowned upon.

You can also change how it is invested, or get a disbursement check that you can roll into an IRA or another 401k. You can invest it however you wish, as long as you follow some IRS rules.

This is my layman's understanding of how my 401k works. I'm happy to bullshit my way through any more questions that you have. :-)
05/12/2006 06:41:33 PM · #5
Oh, that gives me an idea. I'm a banker, so bear with me. See if you can roll it into a Simple IRA. Once it's in a Simple IRA, you can take a distribution on it for a 10% income tax penalty. I'm just not sure you can roll it into a Simple vs. a Roth, and I'm not sure about the distribution requirements on a Roth. I asked my co-worker about hers, and hers that she had so many problems with was a 457 type 401k. Good luck!

Originally posted by photomikey:

You haven't paid taxes on that money yet. You're saving it for retirement.

Some consider this to be unwise, as the tax rate when you retire may be higher than it is now. (Conversely, it may be lower.)

Anyhow, to withdraw the money, you would have to pay the taxes on it, and pay a substancial (~20%?) penalty on it.

You can borrow aginst it, and pay yourself the interest, but for a variety of reasons that I don't fully understand, this is generally frowned upon.

You can also change how it is invested, or get a disbursement check that you can roll into an IRA or another 401k. You can invest it however you wish, as long as you follow some IRS rules.

This is my layman's understanding of how my 401k works. I'm happy to bullshit my way through any more questions that you have. :-)

05/12/2006 06:46:46 PM · #6
If you are still enrolled in the plan (working for the company) you should be able to get a hardship withdrawal for any of the following reasons:

Substantial medical expense
Purchase (except for mortgage payments) of primary residence
Payment of tuition
Prevention of eviction
Pay federal, state, or local taxes on the withrawal.

You will have to pay taxes on the income and may have to pay a penalty.

If you are no longer working for the company, you should be able to get it out. You can always ask for an SPD - summary plan description - which will outline all the details.

Edit: there may be minimum balance issues - $5,000 and $1,000 being key values. Get a copy of your SPD - it will have all the information.

Message edited by author 2006-05-12 18:54:51.
05/12/2006 06:46:54 PM · #7
As far as I know, (and I don't work for the IRS) you have to leave your place of employment to get at the money. And then I believe it still has to be under a certain amount ($5000 I've been told) or they can still keep and administer it. I got mine when I lost my job in October. But, my husband who was laid off at the same time still can't get his. His new job doesn't have 401k which is the the only way they said they'll give it up (if it's rolled over to a new employer). So... basically you're probably screwed. Again, just my general knowledge.

Edit to add... I did have to pay a penalty and taxes on it.

Message edited by author 2006-05-12 18:48:23.
05/12/2006 06:58:51 PM · #8
I dunno what to do...but I stopped contributing for now -- where the money's going to go, like I said earlier doesn't really matter for the purposes of this thread anyway...

The guy on the phone basically told me there's nothing I can do unless I leave the company. I don't know...but I find this a bit frustrating.

Eventually I'll leave the company anyway so I'll get it at some point...and if they refuse to give it to me, I'll find a way to get it.

--

Oh, and as someone mentioned above, the guy on the phone actually had the nerve to ask me if I wanted a loan...Yeah...loan me MY money, pleeeeeeeeease give me a loan with my own money...see if it ever gets a dime paid back to it.
05/12/2006 07:19:35 PM · #9
Deapee,
Don't worry, the money will always be yours (unless you worked for Enron). The beauty of a 401k is that if you put in a small percentage of your salary yearly now, that amount will compound by huge amounts by the time you're 60. I know you're 24 now (according to your profile) and it's hard to see that far ahead... BUT, with the social security system under heavey pressure, it is a good idea to have private investments.

As for how much to put into the 401k? A lot of firms will match whatever you put in up to a certain percentage. So, for example, if you put in 5% and the firm matches 5%, then you will effectively be paid 5% more of your salary, but won't be able to spend it without a heavey tax penalty or meeting the criteria mentioned by other posters.

So what should you do? I'm not a financial advisor; but I just graduated college and am starting a management consulting job very soon, so I looked into this a bit. I would say that if your employer doesn't match your contribution, then you should put in 1-2% of your salary, just to start building a base for the future. If your employer does match your contribution, then milk them for all you can, and contribute as much as possible.
05/12/2006 07:58:30 PM · #10
Most 401k plans that I have knowledge of allow you to direct, to a significant degree, how your funds are invested. There are risks with any investment, but at least if you are directing it, it's risk that you have chosen.
As some others have posted, you simply cannot get it out unless you leave. When you do change jobs, simply take it and roll it into a self-directed IRA. When you do this, *don't* take possession of the check yourself. Make sure it goes directly from the manager of the 401k to the manager of the IRA. If you ever have possession of the money, it is now taxable, and you will have to pay income tax plus the penalty.
Unless you know for certain that your retirement is secure, you should be contributing to a 401k, or investing an equivalent amount in an after-tax long-term investment. The big plus of a 401k is that it *is* hard to get at the funds, so folks don't raid them as often prior to retirement.
05/12/2006 08:05:35 PM · #11
They can be pretty bad and it's criminal IMO how retirement plans can be setup. I had one that delayed the 401K deposits by at least 6 weeks - better than an overdraft for the company I guess :-/

Ask the question over here for the investment piece and here for the tax pieces to at least get what options are available.

A lot of companies have a match which equates to free money, so better to contribute to get that match in most cases (not all!).

You can get loans and I believe [might be wrong] the interest is paid to your account not the 401K company but be careful because the loan becomes payable in full if you leave or are downsized (or whatever the currect PC term is).

Your milage may vary and this is worth what you paid :-))
05/12/2006 10:00:25 PM · #12
Originally posted by deapee:

I dunno what to do...but I stopped contributing for now -- where the money's going to go, like I said earlier doesn't really matter for the purposes of this thread anyway...

The guy on the phone basically told me there's nothing I can do unless I leave the company. I don't know...but I find this a bit frustrating.

Eventually I'll leave the company anyway so I'll get it at some point...and if they refuse to give it to me, I'll find a way to get it.

--

Oh, and as someone mentioned above, the guy on the phone actually had the nerve to ask me if I wanted a loan...Yeah...loan me MY money, pleeeeeeeeease give me a loan with my own money...see if it ever gets a dime paid back to it.


Under Internal Revenue Service rules, if you take an early distribution on your 401(k) plan, you must pay a penalty of 50% of the distribution taken -- in other words, you'll give up half your money.

IRS provisions do allow for borrowing the funds in your 401(k), but it must be an "arms-length" transaction with fair-market interest charged. If you do this, the loan is essentially an investment held by your 401(k) -- that is, you are borrowing from yourself, paying back yourself, and the interest is paid to yourself and goes back into the 401(k). Ameriquest is not charging you the interest, you are charging yourself the interest. Typically, your repayments are taken via payroll deduction.

You should be aware that there are significant risks in taking a 401(k) loan. Most significantly, if your employment with your current employer is terminated for ANY reason (you quit, they fire your or lay you off), the entire balance of the loan typically becomes due and payable. If you fail to pay back the balance of the loan within the time mandated by the IRS (60 days, I believe), the remaining balance of the loan is deemed a distribution and subject to the 50% early-withdrawal penalty. Essentially, by taking the loan, you lock yourself into your employer until it is paid. You are also killing a very significant chunk of your retirement savings, as you not only lose that money but also the opportunity for it to compound many times over as a result of your investments.

Generally speaking, I believe a 401(k) loan is a bad idea given the risks and "opportunity costs." If you need this money, you should consider other means, such as a conventional loan, if at all possible.

~Terry
05/12/2006 10:11:44 PM · #13
Originally posted by ClubJuggle:



Under Internal Revenue Service rules, if you take an early distribution on your 401(k) plan, you must pay a penalty of 50% of the distribution taken -- in other words, you'll give up half your money.

Edit to add: From the IRS website
//www.irs.gov/faqs/faq-kw50.html

IRS provisions do allow for borrowing the funds in your 401(k), but it must be an "arms-length" transaction with fair-market interest charged. If you do this, the loan is essentially an investment held by your 401(k) -- that is, you are borrowing from yourself, paying back yourself, and the interest is paid to yourself and goes back into the 401(k). Ameriquest is not charging you the interest, you are charging yourself the interest. Typically, your repayments are taken via payroll deduction.

You should be aware that there are significant risks in taking a 401(k) loan. Most significantly, if your employment with your current employer is terminated for ANY reason (you quit, they fire your or lay you off), the entire balance of the loan typically becomes due and payable. If you fail to pay back the balance of the loan within the time mandated by the IRS (60 days, I believe), the remaining balance of the loan is deemed a distribution and subject to the 50% early-withdrawal penalty. Essentially, by taking the loan, you lock yourself into your employer until it is paid. You are also killing a very significant chunk of your retirement savings, as you not only lose that money but also the opportunity for it to compound many times over as a result of your investments.

Generally speaking, I believe a 401(k) loan is a bad idea given the risks and "opportunity costs." If you need this money, you should consider other means, such as a conventional loan, if at all possible.

~Terry


Where is the 50% number coming from? I've taken an early distribution in the past (left the company), and only had to pay normal taxes plus 10%.

For the person who didn't understand why taking a loan is a bad idea, even though you pay it back to yourself with interest - you pay the money back with post tax dollars, and when you eventually take a distribution, you pay taxes on that. Effectively, you're having to pay taxes on the same money twice, in addition to losing whatever compounded interest you would have gained by leaving the money in place.

val

Message edited by author 2006-05-12 22:16:00.
05/12/2006 10:28:25 PM · #14
Originally posted by shamrock:

Where is the 50% number coming from? I've taken an early distribution in the past (left the company), and only had to pay normal taxes plus 10%.


For some reason I thought it was 50%. You could be right. Maybe I was thinking about the taxes plus penalty leaving only about 1/2 of the money available... it's been quite a while since I dealt with this.

~Terry
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