Withdraw 401k as savings cushion?

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38981928

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Withdraw 401k as savings cushion?

Postby 38981928 » Mon Dec 11, 2017 2:39 pm

When I leave my company to go to law school I'm allowed to withdraw my 401k while keeping the employer contributions. However, I haven't been working for a long time and haven't been saving particularly aggressively, so I have under $10,000 and feel pretty confident I can make up the lost money/interest after law school. My mom has some medical debt left over from a major emergency surgery I needed a few years ago and I wanted to clear that off her plate. She didn't ask me to do that, but I feel guilty because my stepdad has had to take a massive paycut after losing his job and she is also still paying off Parent PLUS loans she took out for my undergrad. When I mentioned this to her, she told me that if I plan to withdraw my 401k I should keep it as an emergency savings cushion because she really can't help me anymore financially for any emergencies in the future and she has a manageable monthly payment thing worked out anyway for the medical debt.

Thoughts on what I should do? I have a little bit of student loan debt from undergrad (~$15,000) and no other debt obligations (no credit card debt and car has been paid off).

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Rowinguy2009

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Re: Withdraw 401k as savings cushion?

Postby Rowinguy2009 » Mon Dec 11, 2017 3:23 pm

If you withdraw these funds you are going to be penalized pretty heavily, right? Is there any reason why you don't just leave the funds in the 401k and then if some (currently hypothetical) emergency strikes, you withdraw the funds then?

Edit to add - I know the obvious answer to my question is "market fluctuation," but IMO if you can potentially avoid the 401k early withdrawal penalty, then risking a potential drop in the market is worth it.

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DorkothyParker

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Re: Withdraw 401k as savings cushion?

Postby DorkothyParker » Mon Dec 11, 2017 3:30 pm

Whatever you withdrawal is taxed as income. There will also likely be a 10% penalty for early w/d. Unless the interest incurred on your debt is greater than the interest earned on your investment, it's not really a great idea. And if you are just setting it aside as "savings" where you earn <1% realistically at most banks, it's just not worth it.

You can take early w/d (with penalty) in cases of emergency anyway (consult your specific plan and a tax advisor) so doing this for savings purposes is just asinine anyway.

I can see the benefit for general "peace of mind," but it's a very most likely a financial loss for you.

coskigirl

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Re: Withdraw 401k as savings cushion?

Postby coskigirl » Fri Jan 05, 2018 10:40 pm

DorkothyParker wrote:Whatever you withdrawal is taxed as income. There will also likely be a 10% penalty for early w/d. Unless the interest incurred on your debt is greater than the interest earned on your investment, it's not really a great idea. And if you are just setting it aside as "savings" where you earn <1% realistically at most banks, it's just not worth it.

You can take early w/d (with penalty) in cases of emergency anyway (consult your specific plan and a tax advisor) so doing this for savings purposes is just asinine anyway.

I can see the benefit for general "peace of mind," but it's a very most likely a financial loss for you.


Yes! Check your accounts to understand how quickly you could get money out but just as a cushion this doesn’t make sense. I just checked my rate of return for the last year and at over 16% it is far better for me to leave money there instead of a savings account.
Last edited by coskigirl on Sat Jan 06, 2018 10:09 pm, edited 1 time in total.

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emkay625

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Re: Withdraw 401k as savings cushion?

Postby emkay625 » Fri Jan 05, 2018 11:17 pm

You would lose a significant portion of the money in taxes plus penalty if you took it out (think 30% or more). You should leave it in.

38981928

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Re: Withdraw 401k as savings cushion?

Postby 38981928 » Mon Jan 08, 2018 12:14 pm

coskigirl wrote:
DorkothyParker wrote:Whatever you withdrawal is taxed as income. There will also likely be a 10% penalty for early w/d. Unless the interest incurred on your debt is greater than the interest earned on your investment, it's not really a great idea. And if you are just setting it aside as "savings" where you earn <1% realistically at most banks, it's just not worth it.

You can take early w/d (with penalty) in cases of emergency anyway (consult your specific plan and a tax advisor) so doing this for savings purposes is just asinine anyway.

I can see the benefit for general "peace of mind," but it's a very most likely a financial loss for you.


Yes! Check your accounts to understand how quickly you could get money out but just as a cushion this doesn’t make sense. I just checked my rate of return for the last year and at over 16% it is far better for me to leave money there instead of a savings account.


Ok, and if my rate of return is significantly lower (7%), should I look into rolling it over to another plan like an IRA? Or does the fact that I'm making such little interest change whether or not I should pull out the funds?

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Re: Withdraw 401k as savings cushion?

Postby Danger Zone » Mon Jan 08, 2018 12:18 pm

38981928 wrote:
coskigirl wrote:
DorkothyParker wrote:Whatever you withdrawal is taxed as income. There will also likely be a 10% penalty for early w/d. Unless the interest incurred on your debt is greater than the interest earned on your investment, it's not really a great idea. And if you are just setting it aside as "savings" where you earn <1% realistically at most banks, it's just not worth it.

You can take early w/d (with penalty) in cases of emergency anyway (consult your specific plan and a tax advisor) so doing this for savings purposes is just asinine anyway.

I can see the benefit for general "peace of mind," but it's a very most likely a financial loss for you.


Yes! Check your accounts to understand how quickly you could get money out but just as a cushion this doesn’t make sense. I just checked my rate of return for the last year and at over 16% it is far better for me to leave money there instead of a savings account.


Ok, and if my rate of return is significantly lower (7%), should I look into rolling it over to another plan like an IRA? Or does the fact that I'm making such little interest change whether or not I should pull out the funds?

Leave it in and find better funds to invest in. Last year was a crazy bull market and making only 7% in that environment is really bad.
Last edited by Danger Zone on Sat Jan 27, 2018 2:26 pm, edited 1 time in total.

38981928

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Re: Withdraw 401k as savings cushion?

Postby 38981928 » Mon Jan 08, 2018 12:33 pm

Danger Zone wrote:
38981928 wrote:
coskigirl wrote:
DorkothyParker wrote:Whatever you withdrawal is taxed as income. There will also likely be a 10% penalty for early w/d. Unless the interest incurred on your debt is greater than the interest earned on your investment, it's not really a great idea. And if you are just setting it aside as "savings" where you earn <1% realistically at most banks, it's just not worth it.

You can take early w/d (with penalty) in cases of emergency anyway (consult your specific plan and a tax advisor) so doing this for savings purposes is just asinine anyway.

I can see the benefit for general "peace of mind," but it's a very most likely a financial loss for you.


Yes! Check your accounts to understand how quickly you could get money out but just as a cushion this doesn’t make sense. I just checked my rate of return for the last year and at over 16% it is far better for me to leave money there instead of a savings account.


Ok, and if my rate of return is significantly lower (7%), should I look into rolling it over to another plan like an IRA? Or does the fact that I'm making such little interest change whether or not I should pull out the funds?

Leave it in and find better funds to invest in. Last year was a crazy bull market and making only 7% in that environment is really bad.


Ok, thanks! I definitely need to look into my options there. I was really overwhelmed with my choices when I got all the 401k paperwork when I started my job out of undergrad last year, and I don't think I picked the best investment options because I really had no clue what I was doing beyond trying to max my employer contribution. Thank you!

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LSATuration

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Re: Withdraw 401k as savings cushion?

Postby LSATuration » Mon Jan 08, 2018 12:48 pm

You won't face a penalty if you withdraw funds to pay for qualified educational expenses like tuition, IIRC.

If you're only concerned about COL, then don't, but it's a bit harder if you need to pay tuition as well

38981928

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Re: Withdraw 401k as savings cushion?

Postby 38981928 » Mon Jan 08, 2018 1:02 pm

LSATuration wrote:You won't face a penalty if you withdraw funds to pay for qualified educational expenses like tuition, IIRC.

If you're only concerned about COL, then don't, but it's a bit harder if you need to pay tuition as well


At the moment I have a T10 named full ride and close to full rides at other T13s (which I am considering negotiating, but the named full ride is at a school that's been a top pick for me since before I even started applying). I know it's still pretty early in the cycle and I might waver a bit in my preferences if I get HYS or CCN with some $, but for now I was thinking of pulling the funds to help pay for COL. I'm not sure if this is the correct way to go about it, but COL would include health insurance, correct? I don't qualify under my mom's plan anymore (currently on work insurance) and medical expenses and that sort of thing is where I was thinking of allocating those funds. My history of medical problems has definitely made me nervous about not having good insurance and a solid cushion to pay for deductibles and whatnot.

If the funds would be used for tuition, would that change anyone's advice, seeing as there would be no penalty for it? I've heard differing opinions about it.

coskigirl

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Re: Withdraw 401k as savings cushion?

Postby coskigirl » Mon Jan 08, 2018 1:30 pm

38981928 wrote:
Danger Zone wrote:
38981928 wrote:
coskigirl wrote:
DorkothyParker wrote:Whatever you withdrawal is taxed as income. There will also likely be a 10% penalty for early w/d. Unless the interest incurred on your debt is greater than the interest earned on your investment, it's not really a great idea. And if you are just setting it aside as "savings" where you earn <1% realistically at most banks, it's just not worth it.

You can take early w/d (with penalty) in cases of emergency anyway (consult your specific plan and a tax advisor) so doing this for savings purposes is just asinine anyway.

I can see the benefit for general "peace of mind," but it's a very most likely a financial loss for you.


Yes! Check your accounts to understand how quickly you could get money out but just as a cushion this doesn’t make sense. I just checked my rate of return for the last year and at over 16% it is far better for me to leave money there instead of a savings account.


Ok, and if my rate of return is significantly lower (7%), should I look into rolling it over to another plan like an IRA? Or does the fact that I'm making such little interest change whether or not I should pull out the funds?

Leave it in and find better funds to invest in. Last year was a crazy bull market and making only 7% in that environment is really bad.


Ok, thanks! I definitely need to look into my options there. I was really overwhelmed with my choices when I got all the 401k paperwork when I started my job out of undergrad last year, and I don't think I picked the best investment options because I really had no clue what I was doing beyond trying to max my employer contribution. Thank you!


Yes, change your investment options. I could get a lot more detailed with mine but in short, I look at the various funds I'm invested in and how they're doing. If they are doing better than others I might move some additional funds and contributions towards them. If they are losing money I reduce. I can do this nearly real-time on our online portal. If you can get a better rate of return than the interest rate on loans (and right now you should be able to) I'd go with leaving it and taking the loans.

As far as health insurance, I think most schools require it whether it be purchased through them or separately. Since I'll still be working I will have (really amazing, good coverage, low-cost I am so very grateful for) insurance through them but otherwise I'd buy through the school.

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TheDistrictFudge

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Re: Withdraw 401k as savings cushion?

Postby TheDistrictFudge » Wed Feb 21, 2018 12:06 am

Roll it over into an IRA and invest in moneymarket funds and/or government bond funds (cheap and low cost). You'll generally have more options in an IRA than within a 401k plan.The cushion/peace of mind is of greater utility than a few years of potential gains (or losses, never forget the losses).

Let me reiterate, only withdraw funds if you are going to use it on qualified educational expenses so it's penalty-free. You'll pay income tax, but the nice thing about being a student is you have little if any income.

Along that line, you could--and this is an advanced move--do a Roth IRA conversion on all or part of your IRA. The beauty is that you can take the tax hit when your income is nothing, keep the money in a tax-deferred vehicle, and never pay income tax on that money again. You'll need to do some serious research and planning if you intend to do this, though.

As for the talk about finding better funds to invest in, I wouldn't worry about that. It's my opinion that the US markets are in for a slow couple of years. Cash is and always will be king, though.




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