| One Step Backward, Two Steps Forward?? |
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thesnobear
First Time Poster
Cash: $ 0.25
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Joined: 03 Jul 2011
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| One Step Backward, Two Steps Forward?? |
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My wife recently changed employers - she is talking about taking a lump sum distribution of her 401K, rather than rolling it over. This will mean taking a loss, because of the 10% penalty + taxes will be due. I wanted to throw this out there for the discussion sake of it - Here is what she is thinking...
She currently has 260K in her 401K account. (she will have a retirement check later in life). Her yearly gross income is $80K+. My 401K is nearly $400K. My income is $80K gross.
Her thinking will obviously put us in a much higher tax bracket for this year. 260K (401 money) + 160K gross - about $420K. With this extra money she wants to pay our existing debts off. She formerly work a remote site (fly in/fly out) job, but will now be town based and needing a car. She would use the remainder of the distribution to purchase a car (for cash) for buy a piece of lake property to build a new house.
She is willing to take a step backwards in the initial loss of her 401k savings, to make what she feels is a step forward (wipe out debts and buy land for cash) to be debt free (in a sense.. we'd still have a current mortgage and a student loan)..
My only hesitation is... the tax implication - I see that she will lose 26K right off the top to penalty.. but what is the tax implication for a one time income of nearly 420K?
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Sun Jul 03, 2011 8:06 pm |
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oldguy
Senior Member
Cash: $ 309.10
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Joined: 21 May 2006
Location: arizona
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quote:
She would use the remainder of the distribution to purchase a car (for cash) for buy a piece of lake property to build a new house.
we'd still have a current mortgage and a student loan)..
The fed tax on the $260k will be about $90,000, plus the $26,000 penalty for early withdrawal, and maybe $15,000 for your state tax. So the net will be about $129,000. But what a waste of financial potential - that $260,000, if rolled into a Rollover IRA @ 11%/yr would be just over $2,000,000 in 20 yrs. And when she retires she can take out about 4% per yr and pay 15% or 20% taxes on it. (That's what I do now, I'm 72 so I have to take a RMD each yr).
If you want to free up some money for land, refi the house - the US mortgage is one of the world's least expensive sources of capital, where else can you get 6-figures at <5% fixed rate and take 30 yrs to repay? - none of the other 190 nations comes close.
Same with cars - car loans are only about 6%, an inexpensive way to rent money. I would NEVER take a 50% cut in a 401k investment when I can borrow that capital elsewhere for <6% fixed, longterm.
BTW, the last time that we paid cash for a new car was in 1985 (jimmy carter loan rates). We have an SP500 fund at Vanguard that has averaged about 11%/yr for over 30 yrs. I could sell $30,000 from our fund, pay $3000 capital gains tax on our profits, and use the other $27,000 to pay cash for a car. Or, I could 100% finance the car and pay about $30,500 in payments over 60 months - and leave our $30,000 in the SP500 where it usually doubles to $60,000 in about 6 years. I choose the latter. And then I sell the old car privately for $4000 or $5000 and add that cash to the SP500 fund too.
Good job on keeping the SL, if it is <5%, I would keep it for the full term - and put your own money to work elsewhere.
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Sun Jul 03, 2011 9:36 pm |
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