| Roll Over My 401(k) Or Cash Out? |
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rhandly
New Poster
Cash: $ 0.45
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Joined: 20 Dec 2006
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| Roll Over My 401(k) Or Cash Out? |
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I recently left my job and I am wondering what I should do with my 401(k) that has $67K dollars in it.
I understand that by taking the money as a payment I will have to pay income taxes on it as well as a 10% penalty because I am not yet of retirement age (I'm 27, by the way).
However, I am planning on buying a house this summer and I could use this money towards my down payment. In other words, every dollar that I don't have I will end up financing for 30 years at 6-7%.
Here are some other things to consider:
1. My income in 2007 will probably be much lower than my income in 2006. This is because in 2006 I had income from my business as well as from my employer. In 2007, I will only have income from my business and it looks like the beginning of the year will be much slower than the middle of 2006.
2. For the current year (2006) my taxable income will be approximately $115K. So that means that if I took the 401(k) money this year, I wouldn't have to pay SS and Medicare on it (if I understand all that correctly).
With all that out of the way, my questions are:
1. Do you think it makes sense for me to take the 401(k) money rather than roll it over? I know will be paying alot in penalties (10% or $6700) but that is nothing compared to financing $67K over 30 years. I estimate that will cost me ~$85K in interest at 6.5%.
2. If I don't roll over the money, should I take the money now in 2006 when I avoid having to pay SS and Medicare or should I wait until 2007 when I will probably make significantly less (maybe $60-80K).
Please let me know your advice ASAP. If I am going to take the money in 2006 I need to get things in the works because there are only a couple weeks left.
Thanks for your help in advance.
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Wed Dec 20, 2006 9:51 am |
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BlankenshipFP
Money Talk Advisor
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In addition to the (nearly incomprehensible) advice from munee, I'll add that your concern over paying SS tax on your distribution is unfounded. You won't owe SS tax on this distribution, if you take it.
That doesn't change the fact that I would not recommend taking the distribution. You will regret it, believe me. Take time to save up some money outside of retirement plans to make your down payment, but don't take it out of your retirement plan.
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Dec 20, 2006 2:40 pm |
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rhandly
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Cash: $ 0.45
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Joined: 20 Dec 2006
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Thank you, Jim. I appreciate you taking the time to answer my question.
There are, perhaps, two pieces of this puzzle I have left out:
1. My wife and I are very good at saving money. We already have a significant down payment saved up, but I HATE paying interest. I'm not too worried about us getting the money together to retire. As I said, we're both 27 so we have alot of time to do that and will have more money to save for retirement if our mortgage payments are lower.
2. This may be where the irrationality of my argument comes into play. I am in the process of starting my own business and I would love to be able to stay home with our newly born daughter. Of course, the lower our mortgage payments the more chance that my business will be able to sustain enough income to make the payments.
So, as you can see, I'm very interested in lowering my mortgage payments as much as possible.
I guess what I'm getting at is that I believe I've done the calculations of how much money I'm going to be "losing" by taking this money out now, but I think it will lead to a much higher quality of life for my family.
I truly respect the members of this forum's opinions so I'm interested to hear what you all have to say.
Thanks again for your time.
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Wed Dec 20, 2006 3:24 pm |
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efflandt
Senior Member
Cash: $ 80.45
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Location: Elgin, IL USA
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I would suggest rolling it over to an IRA until you figure everything out (direct trustee to trustee transfer to avoid withholding). For one thing, if you do decide to take a distribution, that is best done when your income is minimal, so it would hopefully be taxed at a lower rate.
If you took the distribution this year, what is your federal and state tax rate? That and the 10% penalty may eat up half of your distribution.
Something to note is that you can escape the 10% penalty for up to $10,000 IRA distribution towards your first home (although still subject to income tax which would diminish it somewhat). I don't think that applies to a 401(k) (so it would have to go to an IRA first).
But if you can figure out compounding spreadsheet formulas, you may find that $67k compounded at 8-10% tax deferred in the long run more than makes up for paying deductable 6.5% interest on $30-40k you would end up with towards down payment. But I guess it depends whether your business would cover your mortgage payments, or if you end up with higher interest rate due to undocumented (unpredictable) income.
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Fri Dec 22, 2006 5:25 am |
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