I recently lost my job. My 401k only has $2000. in it. I'm really low on cash & Christmas is coming. Is it worth cashing out to give my kids a Chrismtas?
2006-12-09 05:40:31 · 6 answers · asked by Amy 3 in Business & Finance ➔ Personal Finance
You'll likely end up with a little less than 40% or so of the balance after taxes, early-withdrawl penalties and capital gains taxes, so probably about $800. If you are in your 30s, and you leave it there until you retire, it could be worth $35-$40,000, and you will thoroughly regret having taken it for a fake holiday designed to make you spend money. If you are in your 20s, it could be worth almost a quarter of a million dollars, and if you withdraw it now, when you are 70 you will be mad as hell at yourself!
Unless you have raised them to be complete monsters, your kids really don't care about (or comprehend) the cash value of gifts. So better than cashing out your retirement money is to give them something cheap, and save enough that you aren't a burden on them when you get old!
PS I know it doesn't feel like it right now, but this actually the best time of year to get laid off. Rest up over the holidays, send out some resumes, find a better job! Lots of hiring goes on at the beginning of the year. Good luck...
2006-12-09 07:33:27 · answer #1 · answered by Anonymous · 1⤊ 0⤋
They take 20% out for tax withholding and then a 10% penalty for early withdrawal so you'll have $600 taken off the top and then you will owe taxes based on your taxable amount. Any growth that the fund would produce over time would be lost as well so that $2,000 is a headstart for long term savings which is why it was started in the first place. Forget that you have it and then roll over to a new plan once you are employed again so you can watch the fund. I know what you mean about wanting it NOW but really it'll do more harm than good to withdraw it. If you live within your means, you will have a far happier future. If it were a question of paying rent or your utilities shut off, that would be different but for holiday gifts, DON'T do it. You can be more creative with gifts for the kids. They may not get Ipods and playstations this year but there are lots of things you can do at the dollar stores or Ebay. Now is a good time to reduce your Christmas card list and unneccesary expenses. I am sorry about the loss of your job. I have been there. I was out of work for six months and now have a job paying me more than the last one with better income and better benefits. Don't get discouraged... the right situation is out there. Make your Christmas merry by using your heart and head instead of your 401K plan. You'll thank me in 10, 20 or whatever number of years before you retire.
2006-12-09 06:19:20 · answer #2 · answered by Anonymous · 1⤊ 0⤋
It will be treated as taxable income. There is a 10% penalty in addition. So whatever else happens you will owe the IRS $200. The penalty (but not the tax) can be waived if you meet certain criteria. See the link below.
In any case the plan will have to withhold 20% federal income tax so your $2,000 will shrink to about $1,600. you will get some of this back if your tax rate is less than 20%. In reality, what it will do is reduce the effect of the $200 penalty. As you can see, it is expensive to cash in a 401k. It is always best to avoid it if at all possible, but it is understandable if you really cannot.
Some people will no doubt preach that you should have money saved elsewhere for such situations. In an ideal world, that is true. Unfortunately, life in the USA can be tough for many people, living paycheck to paycheck. However, many financial advisers recommend building a cash reserve (in addition to a retirement plan) of about three months' living expenses. If you can do that, it would be great but you do need to find a job first. I wish you the best of luck with that.
2006-12-09 06:01:02 · answer #3 · answered by skip 6 · 1⤊ 0⤋
No, because they will take you at the rate you should have been taxed on the money in the first place and then they will take out penalties as well. Not worth it. Tell kids you love them and not much money for presents this year. They will understand. Try to get some toys and so forth from some charitable organizations.
We all need a helping hand once in a while.
2006-12-09 05:43:45 · answer #4 · answered by Anonymous · 0⤊ 0⤋
First the penalty then the taxes, federal and state at the highest rate, maybe you get $600 of that $2,000. Not worth it. Let it grow. Renate is right. Give them lots of hugs this Christmas...
2006-12-09 05:48:07 · answer #5 · answered by Anonymous · 0⤊ 0⤋
First of all, it takes about 2 weeks to process the paperwork so you are probably too late for Christmas, especially since they would have to mail you the paperwork and then you mail it back. If all you have in it is $2000, then you might see $1400.
2006-12-09 05:48:55 · answer #6 · answered by Bob N 2 · 1⤊ 0⤋