Raiding 401k/IRA - How much is peace of mind worth?

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SilverDollars
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Raiding 401k/IRA - How much is peace of mind worth?

Post by SilverDollars » Mon Oct 08, 2018 8:42 am

I've been toying with an idea for a while, and resisting the urge.

Let's say that I have amassed a sizable pre-tax retirement amount. In proportion to my post-tax investments (almost none), liquid cash and Roth IRA (very small since I am never allowed to contribute), my pre-tax IRA and 401Ks are large.

I have considered taking a chunk of the pre-tax retirement money out, with the 10% penalty, to pay off debts right now that would open up the budget and allow me to start building out post-tax investments. Whether that be stocks, rental properties, or a business investment ... these debts would include a car loan, a sewer assessment loan, and a personal loan. It would open up something like $1200 a month in cash flow, and in theory move me to a place where I could save up 15K per year instead of saving almost nothing per year and just making ends meet.

In the end, I am going to first exhaust a HELOC option, and also consider just continuing to spend my years never getting ahead, knowing my retirement is building but suffering a lot every day mentally from lack of cash flow ... but I am curious if anyone has considered paying a 10% penalty on an amount to create peace of mind going forward. I guess it might be in the same camp as spending more on a luxury car (that isn't in any way measurably worth it, but makes the person FEEL happier every day).

livesoft
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by livesoft » Mon Oct 08, 2018 8:46 am

If the interest rates on your loans are over 20%, then it might make sense. Don't forget that not only do you pay the penalty, but you also pay the ordinary income taxes on the withdrawal. That pretty much means it would be a terrible idea.

What if you just stopped contributing to your 401(k) for 2 months or lowered your contribution amount a little bit?

Peace of mind is worthless. It's a trap that many people fall into.
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Elysium
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by Elysium » Mon Oct 08, 2018 8:52 am

Not at all worth it. Don't do it unless you are struggling to put food on the table.

Instead, try to pay off debts by attacking them as suggested by Dave Ramsey, and to reduce rates look around for ZERO interest balance transfer CC offers. Build some cash on the side, even using small amounts.

clemrick
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by clemrick » Mon Oct 08, 2018 11:19 am

I agree with another poster who suggested that you stop or at least cut back on the amount you are contributing to your retirement accounts for a year or two. Leave the money in those accounts to not only grow, but avoid the penalty and taxes. The money spent on the penalty and taxes is lost money and at your tax rate, it is not worth the loss of money and time.

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Earl Lemongrab
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by Earl Lemongrab » Mon Oct 08, 2018 11:23 am

If you're unable to make regular Roth contributions, then you're in a significant tax bracket. Don't forget state income tax if applicable.

With a high income, what debts are you incurring? What kind of interest rates?

Have you looked at rolling the TIRAs into the 401(k) to open up the backdoor Roth?
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SilverDollars
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by SilverDollars » Mon Oct 08, 2018 1:31 pm

Earl Lemongrab wrote:
Mon Oct 08, 2018 11:23 am
If you're unable to make regular Roth contributions, then you're in a significant tax bracket. Don't forget state income tax if applicable.

With a high income, what debts are you incurring? What kind of interest rates?

Have you looked at rolling the TIRAs into the 401(k) to open up the backdoor Roth?
Yes, in a significant tax bracket for income reasons, but also live in one of the most expensive places in the country. So really, I only get taxed like the rich. My soil is worth 10 times more than other people's, but can barely afford other things like autos, food, because so much of the income and expense is all cost of living based :)

I mentioned above, debts are car loan (2.9% rate), 20k sewer assessment (levied by town I had no choice @5.5%), 25K on a 0% credit card that needs to be paid off by Summer 2019, that I used to help pay for the home renovation. I've been paying $500 a month on the balance, but will have to have it dealt with by next Summer. Those three are $1400 or so a month in cash flow.

I maxed out my 2018 401k with my bonus at the beginning of year, so can't really stop contributing since I haven't been all year since that one time max out.

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David Jay
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by David Jay » Mon Oct 08, 2018 1:37 pm

As others have said, stop making (or cut way back on) 401K contributions while you make big payments on your debts. That is the equivalent of withdrawing $18,000 of 401K money in 2019 but without paying the 10% penalty.
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delamer
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by delamer » Mon Oct 08, 2018 1:44 pm

Just to make sure you understand, the 10% penalty is 10% of the amount withdrawn from the IRA. So if you take out $100,000, you pay a $10,000 penalty plus your income taxes at your marginal rate.

If your marginal rate is 25% for federal and state, you’d pay $35,000 in taxes. So you have just $65,000 left to spend of the initial $100,000.

Once you figure out the taxes, I bet the idea will be a lot less appealing.

What about a cash-out refinance of your mortgage, if you have the equity?

livesoft
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by livesoft » Mon Oct 08, 2018 2:10 pm

So you have to hope you get a bonus in early 2019.
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TravelforFun
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by TravelforFun » Mon Oct 08, 2018 2:15 pm

How close are you to age 59.5? I don't mind cashing out a portion of my IRA to become debt free. I did that with my home in 2013 shortly after I turned 59.5 to avoid paying the 10% penalty.

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JoMoney
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by JoMoney » Mon Oct 08, 2018 2:21 pm

Raiding 401k is a horrible idea. Not only will you pay 10% penalty, all the money taken out will be taxable income at the top end of your current tax bracket... it might even push you into another higher bracket.
You didn't specify where you live, but I'll point out that California also has an additional state penalty/tax on early withdrawals.
Shifting the debt to a 401k loan to yourself might be better, but also not preferable.
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Earl Lemongrab
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by Earl Lemongrab » Mon Oct 08, 2018 7:17 pm

There's a good possibility that you're in either California or New York. In that case pretty significant state and possibly local taxes would also be due as well as federal and penalty.

None of what you list seems onerous. If you can't pay it out of cashflow, a 401(k) loan might be something to look into. The new tax laws make those more favorable.
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sailaway
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by sailaway » Mon Oct 08, 2018 8:24 pm

In addition to the concerns of these have stated, I will add that your investment plan seems way to vague.

You dug yourself into a hole and you claim that your high income just doesn't cover expenses. I think you are more likely to be successful if you make a plan and stick to it. Build up a small emergency fund, pay down one of the debts, out that money to paying down the next...and in the meantime, come up with a more concrete investment plan for when you have freed up your cash flow.

sawhorse
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Re: Raiding 401k/IRA - How much is peace of mind worth?

Post by sawhorse » Tue Oct 09, 2018 12:02 am

Since you indicated that you already have a large 401k and a large IRA, I don't see why you shouldn't stop contributing to them until you get your debt under control.

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