Should I Cash In My 401(k)??

[MeghanAndrews]

Hey Everyone,
I wanted to get your opinions on this. First, I'm 38. My job isn't very stable right now and it's highly likely that I could end up (along with the rest of the employees) out of work in the next six months. I've been putting in to my 401(k) (not sure if everyone knows what that is, it's a tax-free retirement plan here in the US) for 11 years. I've been maxed out for the last 8. I have enough $ in there that even after taxes, penalties, etc. there's more than enough to take care of transition costs (ffs, grs, hormones, etc).

I'm going through my finances and making sure I have back up plans right now in case my house doesn't sell for what I think it will or if I lose my job. I have not started hormones or RLE yet, HRT is in the fall, RLE is next year.

So, what are some opinions on potentially tapping into my 401(k) and being penalized 50% to use for transition costs. On the one hand, I feel like it's being a little short sighted. I'm thinking "find another job, save the $ and then begin transition and use some of the $ from the sale of the house to cover costs." Then on the other hand I'm thinking "Screw it, you only live once, drain the 401(k), INVEST in your future, make the transition as smooth (financially) as possible and worry about retirement when you get there."

The first thought is closer to how I've always thought, the second one is kind of a new thought for me. It's like, I realize I need to be as prudent as possible when it comes to make big decisions, but on the other hand, if the $ are there, transition is going to be hard enough emotionally, why have to deal with financial issues too?

I just figured I'd get some opinions from Susan's because I've always gotten some really good, guiding advice here. Thanks, Meghan

[melissa90299]

No financial planner would tell you to cash in your 401k, I believe the penalty is 10% plus you will be taxed as regular earnings. There are a lots of ways to minimize your tax burden.

BTW I thought that you can't rollover your 401k until you leave employment of the company.

But you are not asking for financial or tax advice, are you?

Only you know what to do. And I think you know what the answer is.

[cindianna_jones]

Wait until you get laid off and take the money you need when you aren't making anything.  Your taxes will be less that way. There are also a set of circumstances where medical costs can be covered without tax penalty when you use that money too.  Surgery may or may not be tax exempt.  But I would claim it any way.  After all, you have a medical diagnosis and you are going to a hospital.  If audited, you tell them that. Chances are, you'll win.  Meanwhile, invest every penny you can into your transition.  Do not go into debt.  Quit drinking sodas, walk instead of driving.  Dilute your shampoo with water.  Quit eating out.  You get the idea.

Sell your house and take the once in a lifetime exemption for the profits. Once you have transitioned, reinvest what you have left into a new home for yourself.  You may be able to put most of what you took out back into your new house.  If you can do that, take the tax hit and not the exemption.  That exemption can come in handy later in life when you want to buy an RV.

If you take your money out and incur your medical costs in the year you aren't working much, the tax implications will be reduced significantly.

I am not a tax professional.  I am not giving advice.  My opinions are free and worth every penny. 

You sure you want to go through with this?

Cindi

[cindianna_jones]

If I had a choice between keeping my 401k in tact or GRS,  I can tell you what I'd do.

Oh... that's right... I did!  I'm still using my 401k to live on even though I am not old enough to withdraw it without penalty.  My investing has been sound and the penalty has been a minor thing compared to trading in a standard account where I'd have to pay taxes on every sale.  It will last me a few more years... just enough before hubby's retirement kicks in when he's 52.

The government would have you believe that the 401k is sacrosanct.  For most people it should be, for that is what their retirement will be.  But in your thirties, you can still pay for your GRS and still have a few years to rebuild it.  But you should know all the facts, risks, and tax liabilities for doing so.

Cindi

[melissa90299]

Hmmm....seems to me that with these kinds of assets that financing your transition would be your best option, there are lots of possibilities here but not enough info. My feeling is that putting off transitioning could be hazardous to your health. You may screw up your financial health but what's more important, your financial health or your emotional, mental and spiritual health?



Posted on: August 07, 2007, 12:07:50 AM

If I had a choice between keeping my 401k in tact or GRS,  I can tell you what I'd do.

Oh... that's right... I did!  I'm still using my 401k to live on even though I am not old enough to withdraw it without penalty.  My investing has been sound and the penalty has been a minor thing compared to trading in a standard account where I'd have to pay taxes on every sale.  It will last me a few more years... just enough before hubby's retirement kicks in when he's 52.

The government would have you believe that the 401k is sacrosanct.  For most people it should be, for that is what their retirement will be.  But in your thirties, you can still pay for your GRS and still have a few years to rebuild it.  But you should know all the facts, risks, and tax liabilities for doing so.

Cindi

Maybe I am missing something here but I didn't know one could draw money from their 401k until they rolled it into an IRA. 

[cindianna_jones]

There are ways to get at the money.  Yes, if you have the option, roll it over into a self controlled IRA.  That's what I was thinking of when I crafted my responses.

But most companies will allow you to take a loan from your 401K plan.  When you pay the money back, some of the interest is paid to yourself!  Now that is a darned good way to get money.  I've used it a few times.

Cindi

[Christine Eryn]

I don't know alot about a 401K, never took a finance class, and actually am pretty bad with money. 

But if I were to have a source to help transition smoothy, HELL YES I would use it. I have a pretty good job now and make decent money, and recently I've been thinking... first there would be absolutely no way in hell I would complete transition with my current chauvinist pig, severly anti gay/lesbian/TG/etc co-workers. So I would have another job, probably somewhere else when all is said and done. If I were to make a fraction what I am making now because of my transition actions (transactions? ), I would be happy.

[MeghanAndrews]

No financial planner would tell you to cash in your 401k, I believe the penalty is 10% plus you will be taxed as regular earnings. There are a lots of ways to minimize your tax burden.

BTW I thought that you can't rollover your 401k until you leave employment of the company.

But you are not asking for financial or tax advice, are you?

Only you know what to do. And I think you know what the answer is.

Melissa, my accountant already said don't do it unless you absolutely have to. The penalty is actually, gulp, 45-50%. So basically the last 7 years of contributions will be sucked up in penalty and taxes. I know, tough to swallow. If I didn't have the transition in front of me, I wouldn't even consider it.

Of course I'm asking for financial and tax advice, but I'll add the disclaimer that I realize that my advice is not (most likely) coming from licensed financial planners or accountants and I hereby hold harmless any parties who have given me advice and I fully realize the actions taken on my part are of my own volition. LOL

I'm pretty sure I know what the answer is, just getting some opinions

Wait until you get laid off and take the money you need when you aren't making anything. 

Meanwhile, invest every penny you can into your transition.  Do not go into debt.  Quit drinking sodas, walk instead of driving.  Dilute your shampoo with water.  Quit eating out.  You get the idea.

Sell your house and take the once in a lifetime exemption for the profits. Once you have transitioned, reinvest what you have left into a new home for yourself.  You may be able to put most of what you took out back into your new house.  If you can do that, take the tax hit and not the exemption.  That exemption can come in handy later in life when you want to buy an RV.

If you take your money out and incur your medical costs in the year you aren't working much, the tax implications will be reduced significantly.

I am not a tax professional.  I am not giving advice.  My opinions are free and worth every penny. 

You sure you want to go through with this?

Cindi

Thanks Cindi, I definitely am savings and trying to cut down on my expenses. I definitely plan on the one time exception, for sure! I like the tax idea with the exemption, I hadn't thought of that! Am I sure I want to go through with this? I've never been so sure of anything in my whole life Cindi. I know it will be a tough road, I have no delusions about that, but I have accepted who I am and I'm ready to live me life pursuing real happiness.

NO!!!

Melissa is right, you can roll it over.  Besides the taxes to the IRS you will need to pay for cashing it out are just too high, plus all the penalty fees and everything else.  Also, if you cash it, you will need to report this money as income in your tax return, so IMO, it is not worth it unless it is the very last option you have.

tink

That's the thing Tink, I would only cash it out if I get another job immediately. The way things are in my industry, God only knows how long that will be. I would definitely only touch it if it were the last option I had I think.

There are ways to get at the money.  Yes, if you have the option, roll it over into a self controlled IRA.  That's what I was thinking of when I crafted my responses.

But most companies will allow you to take a loan from your 401K plan.  When you pay the money back, some of the interest is paid to yourself!  Now that is a darned good way to get money.  I've used it a few times.

Cindi

I can only have one loan out at a time. I have a remaining balance of $12K which I'd have to pay off with cash to borrow more $. The max you can borrower is $50K I believe, then you have to pay it back out of your gross earnings. That might actually be better, if I can afford it, than taking the tax hit. hmmm

I don't know alot about a 401K, never took a finance class, and actually am pretty bad with money. 

But if I were to have a source to help transition smoothy, HELL YES I would use it. I have a pretty good job now and make decent money, and recently I've been thinking... first there would be absolutely no way in hell I would complete transition with my current chauvinist pig, severly anti gay/lesbian/TG/etc co-workers. So I would have another job, probably somewhere else when all is said and done. If I were to make a fraction what I am making now because of my transition actions (transactions? ), I would be happy.

Yeah Christine, I've been thinking about the transition and where I want to be when I do it if I lose this job. I DO NOT want to let work get in the way of transition at all, but I also need to be realistic that a job has to support me and I need to have $ coming in to live. That said, I'm doing a lot of research and exploring and trying to find an industry where I can make decent money ($50K+) and that is relatively accepting. I'm in sales now so I don't mind doing sales at all.

Thanks for the advice everyone, I appreciate it, Meghan

[melissa90299]

If you are in direct sales, it is going to be really tough to continue your sales career while transitioning---- even in places like San Francisco, I pulled it off by moving to San Francisco--- I was virtually unemployable in Florida, there are a lot of options, this doesn't have to be all or nothing at all. You could budget say 10k a year to transition. The penalty for early withdrawal of an IRA is 10% plus the applicable taxes.

If you have the money for transition, you are in a lot better shape than a lot of people, you juts have to be realistic and astute as to how you are going to do this, perhaps you might have to live on a lot less than 50k for awhile which can be done. Realistically, if you are looking at sales, you will probably be looking at telemarketing.

[katia]

cashing out your 401k is almost always an absolute last resort. financially, it's a terrible choice (you pay a 10% penalty off the top, any cash-out will have federal income taxes withheld at 25% then the cash-out will be taxed as ordinary income) If you are under 55, there will be a 10% penalty tax on top of that. iow you pay regular income taxes on the money and you lose the ability for that money to grow tax-deferred.  it's your choice though.

[saraswatidevi]

Regardless of what you do with that 401K money I hope you will protect it as much as possible from what will happen if your company fails. For instance, no funds invested in company stock. I have known of companies that locked down the 401K changes that you can make for six months when they knew the company was failing. What they announce is that they are revamping the Retirement Program and you will be able to move funds around again in six months or so. Then the company folds and all your  company funds are not worth anything. This is exactly what happened with Enron.

[cindianna_jones]

If you've had your money invested for 10 years and you are making 10 percent per year (okay I know that it is simplistic) the penalty you will pay (other than the taxes you'd pay in any case on income) is only one year's worth of interest.

No, you shouldn't just  yank the money out for any reason.  But it is an asset that can be leveraged just like any other.  There are rules, regulations, pros and cons. You just need to understand what you are doing to make best use of that money.

As far as I'm concerned, transition is a pretty high priority for most of us.  If you can put off transition only to save your 401K, then put it off indefinitely!  Really.  Why put yourself through all this if you don't have to?

Cindi

[MeghanAndrews]

One thing is definitely certain, I'm not waiting for transition, period. It's just going to be a matter of financing and the logistics of employment. I've got several people who would employ me in our field, I just have to decide if my industry is going to survive through these rough times. I definitely agree with all of you that withdrawing from a retirement plan is a big, big step but rest assured the ONLY time I'll tap into it is if I ABSOLUTELY have to! Otherwise, it's hands off. Thanks for the advice once again, Meghan

[melissa90299]

It doesn't have to be all or nothing at all. You could do one thing at a time. Have you started HRT yet? Facial hair removal?

[MeghanAndrews]

Hi Melissa,
I'm not really looking at it like it's all or nothing really, it's just that I want to get the face stuff done at the same time first. I'm almost done with laser, then I start electrolysis next on the areas where I have some white hairs. HRT is the end of Oct, beg. of November. I'm timing HRT so that my hairs grow out and I'm ready for RLE when the HRT starts to really kick in. That'll also give me time to get the financial stuff taken care of. I'm pretty meticulous when it comes to planning, but I know it doesn't go like clock work. I figure the more time I put into taking care of the details, the less I'll have to worry it when the time comes. Transition is obviously a big thing.

On a somewhat unrelated topic, I saw your post about Dr. O, I'm setting my consult up with Dr. O today, I'll probably have the consult the first week in September   I don't know that I've ever seen work he's done that I haven't been impressed with. Definitely expensive, but I'm ok with that kind of investment that pays returns every day for the rest of my life. Meghan

[melissa90299]

Hi Melissa,
I'm not really looking at it like it's all or nothing really, it's just that I want to get the face stuff done at the same time first. I'm almost done with laser, then I start electrolysis next on the areas where I have some white hairs. HRT is the end of Oct, beg. of November. I'm timing HRT so that my hairs grow out and I'm ready for RLE when the HRT starts to really kick in. That'll also give me time to get the financial stuff taken care of. I'm pretty meticulous when it comes to planning, but I know it doesn't go like clock work. I figure the more time I put into taking care of the details, the less I'll have to worry it when the time comes. Transition is obviously a big thing.

On a somewhat unrelated topic, I saw your post about Dr. O, I'm setting my consult up with Dr. O today, I'll probably have the consult the first week in September   I don't know that I've ever seen work he's done that I haven't been impressed with. Definitely expensive, but I'm ok with that kind of investment that pays returns every day for the rest of my life. Meghan

Tell Mira that "twinpeaksnikki" sent you and you will get a big discount. (LOL Mira doesn't give discounts, though it's cheaper when you get certain things done together) If there is one thing you don't want to cut corners on, it is your face! Dr O changed my life and made it possible for me to move on to GRS without have any qualms. Sounds like you have a good plan, except I wouldn't put off HRT, physical changes are pretty slow and you mask those pretty easily.

I hope I get to meet you and show you around San Francisco!

I am so excited for you. For me, getting my feminine face was the most exciting thing that ever happened in my life even moreso than GRS.

[Suzie]

Hey Everyone,
I wanted to get your opinions on this. First, I'm 38. My job isn't very stable right now and it's highly likely that I could end up (along with the rest of the employees) out of work in the next six months. I've been putting in to my 401(k) (not sure if everyone knows what that is, it's a tax-free retirement plan here in the US) for 11 years. I've been maxed out for the last 8. I have enough $ in there that even after taxes, penalties, etc. there's more than enough to take care of transition costs (ffs, grs, hormones, etc).

First of all, I don't know who told you the scare figure of 50% penalty.  Fire that consultant promptly.  Its not quite that bad, but it can be bad depending on what you do.

Since you've maxed out your k plan for the last 8 years (I assume you mean you've contributed up to the allowed limit), you should have a healthy balance accumulated (although lost a few bucks last week with the stock market tanking like it did).

Another option no one has mentioned, is that you can take out a loan on your 401(k), assuming your plan allows it (most do).  The interest rate should be lower than most personal loans you can get elsewhere.  On the one hand, by taking out a loan, you are losing the interest that money could have been earning by leaving it in there.  But on the other hand, if you took out a personal loan from credit cards for example, you would be paying a much higher interest rate than your K loan.  So, it seems like a better deal if you are in a cash crunch.  Plus you are only 38 so you have a some time to make up that lost money.

As far as taking early distributions from your k plan, you will be hit with a 20% federal withholding tax (not 25% as someone mentioned) and another 10% hit at tax time.  You can only take an early distribution if a) your plan allows it upon termination of employment, b) you are eligible for a "hardship withdrawal" or other stipulations written in your plan doc, or c) you have reached the age of 59 1/2.  I'm not sure if you will get hit with the 10% penalty if you take (b), a good question for your new accountant.

My ultimate advice to you is that if in fact you get laid off, get a new job ASAP to keep the income flowing and various other intangibles from having a job.

Best,
Suzie