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401K Short Term Loan alternatives

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BWSPLLC
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401K Short Term Loan alternatives  Reply with quote  

My spouse has funds with Supervalu 401K, which is a plan she participated in during her employment with a large drug store chain during the 80's and 90's. She quit in 1998 leaving the funds in the account and receives quarterly statements showing a decent return.

She is interested in taking a short-term loan from the account while we await funds from a property we are preparing to sell, and the loan will repaid this calendar year with some of the proceeds from the real estate sale. However, we learned the plan does not allow loans against the account if one is not currently employed by a program participant.

Since she did not rollover the funds to another account upon her separation in 1998, what options might she have to withdraw some or all of the funds without being taxed by the IRS, or otherwise penalized for a partial or total withdrawal from the plan holding her funds?

Consequences aside, it certainly seems possible to withdraw all of the funds from the account, but she's not interested in doing so at the cost of substantial penalties and tax consequences.

Practically speaking, I would think one can withdraw funds held with a given plan at any time provided the funds are returned to a qualifying plan within the same calendar year, but I'm probably wrong...

Anyways, thank you in advance for any meaningful feedback and anticipated correction of my assumptions.
Post Sat Apr 20, 2013 6:40 am
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Wino
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You aren't wrong, but you aren't 100% correct, either. When you withdraw funds, typically 20% is withheld for taxes. Now, if you redeposit what you got plus 25% of what you got (that's the 20% of the 100% we started with) into some qualifying plan, you'll pay no taxes.

So will you be able to repay 20% of what you withdraw not counting the actual funds withdrawn? If not, then don't do it.

I suggest you look for other sources of funding, or better yet, let us know why you need the funds, what your situation is, and let us come up with suggestions you can evaluate as alternatives.

My broad-based suggestion: Don't touch any retirement funds.
Post Sat Apr 20, 2013 10:42 am
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oldguy
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You can borrow from an IRA for free for 60 days, no tax, no interest - but if you are not able to replace the entire amount within the 60 day period, you trigger the full Federal tax, the State Tax plus the 10% early-penalty, ie probably 40% or more of your money, it would be a big loss for you.

You would first need to move the account from the 401k to a Rollover IRA. This would be a good idea anyway - at some point you will want to do this anyway so that all of your accounts will be merged and available for your retirement use.
Post Sat Apr 20, 2013 1:59 pm
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BWSPLLC
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Thank you all for taking the time to read my thread and reply.

I appreciate and respect the advice that one should seek all other options before looking to retirement funds. Unfortunately, we have no alternate source to draw from. The details would be great for a few other threads, but that's not why I'm here now...

We wouldn't consider accessing the funds if there was another option, nor would we do so if there was any question about re-depositing the proceeds to the account. So, knowing that we're doing so with eyes wide open, my goal is simply to find an option whereby we can access some of the funds temporarily, without the burden of the penalties and tax consequences associated with a straight withdrawal.

quote:
Originally posted by Wino
You aren't wrong, but you aren't 100% correct, either. When you withdraw funds, typically 20% is withheld for taxes. Now, if you redeposit what you got plus 25% of what you got (that's the 20% of the 100% we started with) into some qualifying plan, you'll pay no taxes.

So will you be able to repay 20% of what you withdraw not counting the actual funds withdrawn? If not, then don't do it.



Wino-The answer to your question is YES, so let's sort out some details. As I understand your response, funds can be withdrawn from the current account as long as the re-payment is 120% or more of the principal withdrawn, which is absolutely possible. Assuming I'm interpreting your response correctly, you are suggesting that 20% would be withheld at the time of withdrawal and as long as the re-payment includes the gross amount withdrawn, there would be no penalty.

In other words, the numbers would look something like this (using round numbers for demonstrative purposes):

Gross withdrawal amount: $12,500
Net proceeds received after administrator withholds tax reserve: $10,000
Repayment amount: $12,500

I assume the re-payment must occur in the same calendar year. I would ask for further clarification as to whether the re-payment must be to the same account the funds were borrowed from, or, if the re-payment could be to a new account such as an IRA as recommended by oldguy?



quote:
Originally posted by oldguy
You can borrow from an IRA for free for 60 days, no tax, no interest - but if you are not able to replace the entire amount within the 60 day period, you trigger the full Federal tax, the State Tax plus the 10% early-penalty, ie probably 40% or more of your money, it would be a big loss for you.

You would first need to move the account from the 401k to a Rollover IRA. This would be a good idea anyway - at some point you will want to do this anyway so that all of your accounts will be merged and available for your retirement use.


oldguy-Thank you for the response-it is an option I was not aware of and specifically my goal of posting. I'm sure it's a question best suited for another post entirely, but what research is recommended to find the 'right' IRA to roll this account into?


quote:
Originally posted by tasha123
i would suggest try some alternative soursce of money but if you still want from above go and deal all matters with a good lawyer who can help you out legally and you require a good amount of money to sort all this so be ready at fininace


tasha123-I see you are unaware of any methods or options to work through this puzzle. I am not afraid or hesitant to engage counsel when needed. In fact (and, unfortunately) I have spent the upper end of six figures with attorneys throughout the past 12 years and frankly, don't believe this matter is requisite of engaging an attorney.
Post Sat Apr 20, 2013 8:17 pm
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clydewolf
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quote:
Originally posted by BWSPLLC

quote:
Originally posted by Wino
You aren't wrong, but you aren't 100% correct, either. When you withdraw funds, typically 20% is withheld for taxes. Now, if you redeposit what you got plus 25% of what you got (that's the 20% of the 100% we started with) into some qualifying plan, you'll pay no taxes.

So will you be able to repay 20% of what you withdraw not counting the actual funds withdrawn? If not, then don't do it.



Wino-The answer to your question is YES, so let's sort out some details. As I understand your response, funds can be withdrawn from the current account as long as the re-payment is 120% or more of the principal withdrawn, which is absolutely possible. Assuming I'm interpreting your response correctly, you are suggesting that 20% would be withheld at the time of withdrawal and as long as the re-payment includes the gross amount withdrawn, there would be no penalty.

In other words, the numbers would look something like this (using round numbers for demonstrative purposes):

Gross withdrawal amount: $12,500
Net proceeds received after administrator withholds tax reserve: $10,000
Repayment amount: $12,500

I assume the re-payment must occur in the same calendar year.


No, you have 60 days from the day your receive the money to get it back into a tax deferred account.
quote:

I would ask for further clarification as to whether the re-payment must be to the same account the funds were borrowed from, or, if the re-payment could be to a new account such as an IRA as recommended by oldguy?


I doubt the 401k would accept the money coming in. Your wife is not eligible to make any contribution/repayment to the 401k. It would need to be made to an IRA, and there are 60 days to complete that transfer from the 401k to the IRA.

Congress does not want us to use our retirement savings for slush fund purposes.

Do as Oldguy suggested, transfer to the IRA, then take your "60 day loan".
quote:

quote:
Originally posted by oldguy
You can borrow from an IRA for free for 60 days, no tax, no interest - but if you are not able to replace the entire amount within the 60 day period, you trigger the full Federal tax, the State Tax plus the 10% early-penalty, ie probably 40% or more of your money, it would be a big loss for you.

You would first need to move the account from the 401k to a Rollover IRA. This would be a good idea anyway - at some point you will want to do this anyway so that all of your accounts will be merged and available for your retirement use.


oldguy-Thank you for the response-it is an option I was not aware of and specifically my goal of posting. I'm sure it's a question best suited for another post entirely, but what research is recommended to find the 'right' IRA to roll this account into?


puzzle. I am not afraid or hesitant to engage counsel when needed. In fact (and, unfortunately) I have spent the upper end of six figures with attorneys throughout the past 12 years and frankly, don't believe this matter is requisite of engaging an attorney.
Post Sat Apr 20, 2013 8:49 pm
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oldguy
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quote:
oldguy-Thank you for the response-it is an option I was not aware of and specifically my goal of posting. I'm sure it's a question best suited for another post entirely, but what research is recommended to find the 'right' IRA to roll this account into?


You could use either of the major no-load fund companies - Vanguard or Fidelity - they have funds that replicate your current 401k fund (if that is your goal) and they have funds that will meet literally any stock/bond/CD allocation that you could want.
Post Sat Apr 20, 2013 9:08 pm
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