100% vested yet can't access funds

Reply

  #1  
Old 03-19-19, 09:12 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
100% vested yet can't access funds

Anyone else have a 401k account they are fully vested in yet can't cash out? I want to get out as much as I can but my money is being held hostage. My only option is to take out a loan, but that isn't going to cut it. What happened to paying a 10% penalty and taking out what you want?
 
Sponsored Links
  #2  
Old 03-19-19, 09:21 AM
Group Moderator
Join Date: Mar 2003
Location: NC, USA
Posts: 19,274
Don't forget that the 401 was created to encourage retirement spending. It is not a "convenient" loan source. They specifically wrote the rules to make it difficult/expensive to get your money early.
 
  #3  
Old 03-19-19, 09:36 AM
Forum Topic Moderator
Join Date: Mar 2005
Location: USA - N.E.Tn
Posts: 45,028
I've always thought it was foolish to draw money out of any retirement account early and have to pay the penalty. The odds are you'll need that money more later on [when you are of retirement age] than now.
 
  #4  
Old 03-19-19, 09:58 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
I understand they don't want to make it convenient or easy to withdraw money early, which is why I thought the 10% penalty was for. But they are saying I can't get the money period, unless I switch jobs, which I don't plan on doing anytime soon, if ever.

I would be using it to purchase a home, so it would be a wise investment and safer than leaving it in the stock market.
 
  #5  
Old 03-19-19, 10:03 AM
Shadeladie's Avatar
Super Moderator
Join Date: Jan 2005
Location: PA - USA
Posts: 4,123
Umm, wouldn't it be wiser to get a mortgage to purchase the home and leave it where it is for retirement?
 
  #6  
Old 03-19-19, 10:12 AM
Member
Join Date: Jan 2014
Location: USA near Boston, MA
Posts: 563
which is why I thought the 10% penalty was for
That is the incentive that the government uses as a deterrent to early withdrawals (if allowed).

Your 401K plan rules determine whether you are allowed to take a loan or early withdrawal. (Before age 59.5I think. After 59.5 taking regular payments is allowed for "early retirement" purposes.)
 
  #7  
Old 03-19-19, 10:13 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
Umm, wouldn't it be wiser to get a mortgage to purchase the home and leave it where it is for retirement?
It would be a down payment on an investment property, with the potential to bring in $500 month or so rental income. I'm just skeptical when it comes to 401k. It's well known now that they are flawed and will only work for a small percentage of people. It's an untested system and I'd rather have my money in real estate than tied up in the stock market.
 
  #8  
Old 03-19-19, 10:23 AM
Shadeladie's Avatar
Super Moderator
Join Date: Jan 2005
Location: PA - USA
Posts: 4,123
As long as there's a good firm managing it, it should do just fine. Real estate can go down, too.
 
  #9  
Old 03-19-19, 10:25 AM
Member
Join Date: Apr 2015
Location: USA
Posts: 301
Not agreeing/disagreeing with what you said. If you do wind up pulling out you can expect to lose north of 30% of it to penalties and taxes. It'll take you awhile to recoup that. Real estate can do it as can good investing....but.....

If you're sure of your real estate, then a loan against the 401K sounds to me as a possible better strategy. If the real estate can make up the 30% difference, it certainly should be able to cover the loan interest.

Also as John said, if your plan doesn't allow it then you're out of lock.
 
  #10  
Old 03-19-19, 10:32 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
Not agreeing/disagreeing with what you said. If you do wind up pulling out you can expect to lose north of 30% of it to penalties and taxes. It'll take you awhile to recoup that. Real estate can do it as can good investing....but.....
I worked the numbers, and considering equity and rental income, I would make back the taxes and penalty in about 5 years, then start pulling in at least $500/month in rental income and about $400/month in equity, plus home values in my area have been increasing 8% to 10% per year in the past decade and should continue doing so [/QUOTE]

If you're sure of your real estate, then a loan against the 401K sounds to me as a possible better strategy. If the real estate can make up the 30% difference, it certainly should be able to cover the loan interest.
Problem with a loan is I'd have to pay it back in 5 years, and the monthly payment would wipe out any rental income and principal payments. It would be worth it in the long run, but I'd be negative a few hundred dollars for the first 5 years.

Also as John said, if your plan doesn't allow it then you're out of lock.
They will allow a loan, but it's not as much as I want/need, although it would help.
 
  #11  
Old 03-19-19, 10:40 AM
Member
Join Date: Jan 2014
Location: USA near Boston, MA
Posts: 563
Problem with a loan is I'd have to pay it back in 5 years, and the monthly payment would wipe out any rental income and principal payments.
You need to look at it either way (401K or real estate) as a long-term investment to generate retirement income. If you are going to retire before 5 years it would not be a good deal. Even after that, market conditions will affect your investment no matter whether 401k or real estate. And you can't eat equity.
 
  #12  
Old 03-19-19, 10:51 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
Even after that, market conditions will affect your investment no matter whether 401k or real estate.
Sure, but there's a much greater chance a 401k would take a hit, and much more abrupt and significant than real estate. However, even if the real estate took a hit, the fair market rent wouldn't budge, so it wouldn't have any effect, whereas money in a 401k vanishes immediately (mine lost $15k last year and just now recovered).
And you can't eat equity.
..but you can take out an equity loan or sell a house if needed. Evidently you can't do squat with your 401k until you are 59-1/2, and even then there are rules.

Bottom line is I don't like other people controlling my money and don't want my retirement to hinge on the stock market. There's a reason the IRS will so willingly take your money but won't let you have it back, and it isn't because the government or corporations are looking out for your best interests. They have the upper hand, always, and 401k was a god send for them. No more pensions and more tax writeoffs because everyone can participate!
 
  #13  
Old 03-19-19, 11:15 AM
Member
Join Date: Jan 2014
Location: USA near Boston, MA
Posts: 563
equity loan or sell a house
--both market-dependent

My brother-in-law (who is still working) has 6 or 7 rental properties that he is relying on for retirement income in a few years. His biggest complaints are money he has to spend to refurbish/repair when tenants leave, the cost of finding new tenants and the lack of income until new tenants are found. About a year ago he finally got a court ruling against a deadbeat tenant that took five years to resolve. Even though he has a significant judgement in his favor he still has to chase down those payments.

Make sure you factor those kinds of things into your calculations.
 
  #14  
Old 03-19-19, 11:41 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
--both market-dependent
True, but I still think real estate is the better option depending on location. I agree more of a PITA, but I think it's worth it.

My brother-in-law (who is still working) has 6 or 7 rental properties that he is relying on for retirement income in a few years. His biggest complaints are money he has to spend to refurbish/repair when tenants leave, the cost of finding new tenants and the lack of income until new tenants are found. About a year ago he finally got a court ruling against a deadbeat tenant that took five years to resolve. Even though he has a significant judgement in his favor he still has to chase down those payments.
I've had to evict someone before and they were out in a couple months. I only recouped half of what they owed me though. I was too lenient with them, and learned a hard lesson.
 
  #15  
Old 03-19-19, 04:29 PM
Marq1's Avatar
Member
Join Date: Sep 2016
Location: USA MI
Posts: 3,464
It's well known now that they are flawed and will only work for a small percentage of people
It's an untested system
There's a reason the IRS will so willingly take your money but won't let you have it back
it isn't because the government or corporations are looking out for your best interests
So, I'm not going to argue what is better, investments or property, it's a personal decision.

However some of your comments are so off the wall (and inaccurate) about the fundamentals of savings and investments!
 
  #16  
Old 03-20-19, 12:15 PM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
However some of your comments are so off the wall (and inaccurate) about the fundamentals of savings and investments!
Haha, I know. I'm a bit unorthodox and can be a skeptic, for good reason. Bottom line is I want to control my money and don't like that it's being held hostage. 401k IS an untested system though. It hasn't been around long enough for someone to have contributed their entire career (they've only been popular for 25 years or so), and it really doesn't work for the majority of workers. I don't know about you, but I'd much rather have a pension to look forward to, not gamble all my savings in the stock market. I've had co-workers nearing retirement that lost $300k when the dotcom bubble burst.
 
  #17  
Old 03-20-19, 01:22 PM
Forum Topic Moderator
Join Date: Mar 2005
Location: USA - N.E.Tn
Posts: 45,028
But the stock market does have a tendency to recover. I have 2 investment accounts. The smaller one I've had the longest and at one point it lost all of the increase but has since recovered and is currently 10-15% higher than it was when it took the big down turn. Of course that is with someone smarter than me at the helm. IMO the investment companies earn their fees. I wouldn't want all my retirement tied up in one account.
 
  #18  
Old 03-21-19, 07:23 AM
Member
Join Date: Jan 2008
Location: Southeastern Pennsylvania
Posts: 2,934
But they are saying I can't get the money period, unless I switch jobs,
I think you have to be careful with those guys managing your 401K. I had a guy from a major well known firm (wonít say the name) lie outright. I retired early and participated in a formal retirement plan and thus was able to withdraw my 401K without penalty. You must be at least 55 yrs old to do that and must participate in a company retirement plan. He lied through his teeth and said I could NOT get the money at age 55, period, penalties or not. I ignored him and got the money - and without penalty.

That is your money and you can get it any time. Itís just a matter of whether or not you pay a penalty (and taxes of course). The 401K plans have to meet federal requirements. They canít make up their own rules and allow you to only withdraw money when they feel like it. They should be ashamed to lie to people so they wonít withdraw their money. But I doubt that they are ashamed.
 
  #19  
Old 03-21-19, 08:35 AM
Member
Join Date: Nov 2012
Location: USA
Posts: 1,076
You should check the fine print in the 401(k) documentation.
Some of them have a loan provision for home purchase, or a 1031 exchange into real estate investments. The loan option often includes a percentage interest repayment provision, but that CAN actually be good, because if the "repaying interest" clause allows pre-tax dollars, you are actually ADDING funds to the 401k as you repay.

Originally Posted by mossman
I worked the numbers, and considering equity and rental income, I would make back the taxes and penalty in about 5 years, then start pulling in at least $500/month in rental income and about $400/month in equity, plus home values in my area have been increasing 8% to 10% per year in the past decade and should continue doing so
Eh ( playing devil's advocate here)
The person who owns the house usually knows the condition and need for repairs better than you. You should assume that they ALSO run the NUMBERS and concluded that cashing out NOW for $XXX thousand is BETTER than fixing it and getting ~$900 per month in equity/cashflow in 5 years.

Disclaimer- I'm a Realtor and Attorney, but I'm not your Realtor or Attorney.

"All real estate is 'used', except for new-construction, where the ground is 'used' and the building was 'abused'..."
 
  #20  
Old 03-21-19, 09:48 AM
Forum Topic Moderator
Join Date: Sep 2005
Location: USA
Posts: 4,448
Going to your original question, most (all?) 401K plans do not allow cash-out withdrawals regardless of penalty except for certain specifically defined hardships (significant medical bills, purchasing a primary home, higher education). So long story short, you won't be able to pull your money out of your account until you leave the company.

When you do leave, if you take a cash-out (and don't roll it into another 401K or IRA), they'll withhold 30% (10% penalty + 20% taxes). You may owe more or less based on your effective tax rate that year.

If you're set on the real estate endeavor, I've learned, there are always ways to make deals... so keep at it!
 
  #21  
Old 03-21-19, 11:23 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
Eh ( playing devil's advocate here)
The person who owns the house usually knows the condition and need for repairs better than you. You should assume that they ALSO run the NUMBERS and concluded that cashing out NOW for $XXX thousand is BETTER than fixing it and getting ~$900 per month in equity/cashflow in 5 years.
Not sure I'm following you. I would buy a home, rent it out, and take care of all the repairs, improvements myself. I already do this with another rental I have owned for 16 years and things have worked out fine.

When you do leave, if you take a cash-out (and don't roll it into another 401K or IRA), they'll withhold 30% (10% penalty + 20% taxes). You may owe more or less based on your effective tax rate that year.

If you're set on the real estate endeavor, I've learned, there are always ways to make deals... so keep at it!
Problem is I work for a great company, and plan on staying here until retirement. Whether or not that actually happens is up in the air, but I won't be leaving any time soon. I want my money today.
 
  #22  
Old 03-21-19, 11:24 AM
Member
Join Date: Jan 2008
Location: Southeastern Pennsylvania
Posts: 2,934
Going to your original question, most (all?) 401K plans do not allow cash-out withdrawals regardless of penalty except for certain specifically defined hardships (significant medical bills, purchasing a primary home, higher education). So long story short, you won't be able to pull your money out of your account until you leave the company.
Well Iíll be darned. I didnít know that. Maybe the folks I know who took early claimed hardship. That sucks! So mossman is right Ė held hostage. Although I guess you would normally only want to cash-out if you had in fact one of the listed hardships.
 
  #23  
Old 03-21-19, 12:48 PM
Member
Join Date: Apr 2015
Location: USA
Posts: 301
Held hostage??? Hardly.

Let see, the agreement was via a contract to have money taken out of a paycheck pre-tax in exchange for certain rules. Not sure how that to equates to hostage taking. Sounds like a regretful decision was made.
 
  #24  
Old 03-21-19, 01:05 PM
Member
Join Date: Jan 2014
Location: USA near Boston, MA
Posts: 563
Maybe the folks I know who took early claimed hardship
Zoesdad: As you stated correctly in post #18 there are ways to retire early and draw on 401K plans that do not require claiming hardship. They are age- and payment schedule-related and may avoid penalties (but not taxes). Other withdrawals for specific non-retirement related reasons are based on hardship and will incur penalty and tax deductions.
 
  #25  
Old 03-21-19, 03:08 PM
Member
Join Date: Nov 2012
Location: USA
Posts: 1,076
Originally Posted by mossman
Originally Posted by zorfdt
When you do leave, if you take a cash-out (and don't roll it into another 401K or IRA), they'll withhold 30% (10% penalty + 20% taxes). You may owe more or less based on your effective tax rate that year.
Problem is I work for a great company, and plan on staying here until retirement.
I want my money today.
The basic problem is that with a retirement account, this is PRE TAX money.

With a 401k, your company holds pre-tax money in an account for you, the IRS and your company have a deal that the IRS can't tax it as long as you can't access it.

So, while you're saying-
I want my pre-tax money today.

The IRS is saying
I want my income taxes on your unpaid wages today.
 
  #26  
Old 03-22-19, 05:44 AM
Member
Join Date: Oct 2015
Location: Ct.,USA
Posts: 901
Nobody forced you to sign up for 401K deductions. If you didn't read/understand the rules then, shame on you. You will have to pay the price or wait a few more years before you get rich.
 
  #27  
Old 03-22-19, 09:08 AM
Member
Join Date: Jan 2014
Location: USA near Boston, MA
Posts: 563
Mossman, are you still contributing to the 401K? You do not have to.

Plans that are "voluntary" do not require you to participate. Plans that are "non-voluntary" only mean that employers automatically enroll their employees in the plan for a particular level of deduction.

But the IRS requires that non-voluntary plans allow the employees to "opt-out" of making contributions. Obviously if you opt out then the employer will not make any matching contributions.

You will still be in the plan (for tax purposes) but won't be accumulating anything except interest and market changes on money already there.
 
  #28  
Old 03-22-19, 09:37 AM
Member
Thread Starter
Join Date: Mar 2009
Location: Northern Virginia
Posts: 3,822
The IRS is saying
I want my income taxes on your unpaid wages today.
I'll gladly pay the penalty and the taxes, today, but that isn't an option.

Mossman, are you still contributing to the 401K? You do not have to.
No, I am not contributing. I just check the balance periodically to see how much I've gained/lossed.
 
Reply

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Thread Tools
Search this Thread
Display Modes