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October 26, 2010
More 401(k) Savers Take Loans
In short, the loans and withdrawals merely reflect the times in which we live.
I once again refer you to the quote of Fitch Ratings analyst Bob Curran from 2005. It was an attempt to calm our fears and is my favorite quote from the pre-crisis.
April 7, 2005
Home foreclosure listings surged in March
"It may simply reflect our overleveraged society and the fact that people are carrying more debt on everything and it doesn't take a lot to affect a small percentage of them in terms of moving them from homeownership to not," Curran said.
Here's what he said next.
"It's hard to make a case, based on what I see here, that all of a sudden it's become an enormous trend." He said the economy is improving and employment is growing, which bodes well for a homeowner's ability to make mortgage payments.
Oops.
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
-
At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
11 hours ago
10 comments:
Stag,
It's time for some financial innovation. Rather than loan yourself your 401K money, it better to wash the loans by making them to others and receiving reciprocal loans in return.
Here's an example. I loan you $50,000 from my 401K. You loan me $50,000 from your 401K. Or maybe we just invest in each others companies. Something along those lines.
We then both spend most of the money living large and waste the rest on things like food and rent. Then we default on each others loans so our 401K's show disastrous loses. The beauty here is that we got to spent the money without incurring ANY tax liability.
I'm thinking we could set up something like a 1031 fund for 401ks! Let the fees roll in!
Taxes are total bs anyway as the Government isn't ever going to make good on all this debt.
I am with mab. Useful work and real production are very different than shell games with finances.
The failure of analysis 2002-2006 was failing to understand that the housing bubble was driving the economy, not vice versa.
When I first discovered this graph, ca 2007:
http://research.stlouisfed.org/fred2/series/CMDEBT
everything became clear.
The article warns of "hu
ge" tax hit from 401k withdrawals. For long term unemployed folks, how much tax is it really?
- jus me
jus me (and all),
One would think that the "huge" tax hit is mostly just the 10% penalty (for those with little other income), but apparently there are ways to reduce even that.
Tapping an IRA or 401(k) without Taking a Heavy Tax Hit
3. Distributions from an IRA by a qualifying unemployed individual to the extent of health insurance premium payments made for the individual and his or her spouse and dependents. To qualify, you must generally have received unemployment compensation for at least 12 consecutive weeks.
Planning tip: You must make the withdrawal during the year you received the unemployment compensation or the following year, but you cannot make the withdrawal more than 60 days after starting a new job.
That's great news now that health insurance premiums are so high and the unemployed are having difficulties actually starting that new job. Sigh.
For someone with variable income, contributing to an IRA in "fat" years when taxes are near 30%, and withdrawing in lean years at a 10% hit when taxes are near 0%, may make sense.
Even if you don't need the money.
Possible example:
Put $5000 in IRA, save $1500 in taxes.
Now have $6500 in IRA + (cash) tax refund.
Next year, withdraw $5000 from IRA, pay 10% penalty ($500), and 0% marginal tax rate.
Now have $6000 cash.
Rinse, wash, repeat.
Appears to be a money maker, not at all a "huge hit."
THIS IS NOT TAX OR INVESTMENT ADVICE.
I don't know if the scenerio above is actually possible. Anyway it involves an implausible yearly cycling from high income to zero income and back and forth.
Not tax or investment advice.
- jus me
The thing is, it seems like you're better off making the withdrawal than taking the "self-loan" from the 401K.
If you make the withdrawal when you're broke, then when you're working make the deposit, you get the tax credit for the deposit (I THINK, I AM NOT AN ACCOUNTANT OR LAWYER, I DON'T KNOW IF THERE'S A CLAWBACK PROVISION OR ANOTHER GOTCHA).
If you take the loan, you don't get the tax break when you re-pay yourself. (I THINK. I am not a lawyer, accountant, or expert).
So if you're broke, what's the point of taking the loan?
The "experts" seem united in recommending the "path of the self-loan", but in my limited knowledge, I don't see why that's a good thing.
- jus me
Not investment or tax advice.
jus me,
Here's something else to consider.
This is a very dangerous environment to be borrowing from a 401k.
Borrowing from Your 401(k)
Some plans require an employee who loses a job to pay back any 401(k) loans immediately. If you can't repay the loan, then it is considered income, and you must pay taxes on it. If you are under 59 1/2, you also have to pay an early withdrawal penalty of 10 percent of the loan amount.
Losing your job in December (after earning nearly a full year's wages) and then being required to pay off that loan in December (and not January of the next year) would definitely hurt big time.
I think I'm also confusing IRAs and 401Ks.
I think (but don't know) you can withdraw from an IRA at your discretion, but 401Ks require "permission" for a withdrawal.
It seems to me that anyone losing their job would always want to move the 401K to an IRA; why leave it in a 401K if there are more restrictions?
(not advice)
-jus me
"Losing your job in December (after earning nearly a full year's wages) and then being required to pay off that loan in December (and not January of the next year) would definitely hurt big time."
Quite agree! Dang, you'd have to pay the taxes in the "high-earning" year, not beneficial at all.
-jus me
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