401k

[mellowtigger]

I have never wanted a 401k stock market "retirement savings" account.  Everywhere I worked during the last 20 years, though, has given me one even when I deliberately fail to sign the paperwork for it.  Why are companies even allowed to do that instead of pay people higher salary if they simply opt out of it?  I just now looked at the account I got from my last job (ended a few weeks ago).

HOLY MOLEY!

That's more money than I got in a whole year's salary, pre-tax.  I could immediately pay off my house and still have lots of money left over for house repairs, assuming I got the full amount by cashing out now.  Or save it all and wait out this pandemic a whole lot longer.

I might as well cash out.  The dashboard says I've already lost $5K in value this year due to stock market drops, and I expect it to get worse this year.  I just need to look up how much I'll pay in taxes and "early withdrawal" fees.

Anyone here familiar with this process and the penalties involved?  I've already looked over the Fidelity website, but it doesn't get into specifics.  I've created a new link today to my actual bank.  Once that's confirmed, apparently I need to call Fidelity to begin the closure process, so money can be delivered to the bank.

Edit 2022 July 28: I did it.  I withdrew the full amount, with the automatic deposit expected to complete on Tuesday next week.  I'll post details of the numbers and why it makes sense to do it, after all of the money movement has completed.

Comments

[mtbc]

401(k)'s are usually a good deal up to the employer match, at least, best to get as much money as one can out of one's employer! If you withdraw early, I think you're basically looking at income tax plus ten percent. I don't have anywhere near enough to be useful for retirement but it'll be useful for something someday.

[barak]

You have four options when it comes to that 401k: leave it alone, rollover, rollover AND cash out, or cash out.

Any form of cashing out can be pricey, there's a cash out fee from the servicer of your 401K, plus taxes, that sum can be anywhere anywhere from 15% to 24%. You'd need to contact the company for what it would cost.

I think if you lose or leave your job at age 55 or later, you won't have to pay the 10% penalty on withdrawals from the 401(k). It may differ from state to plan, though.

However, I'd suggest you talk to a professional money manager to make sure you're best being served by whatever you want to do. Internet advice is worth what you paid for it.

[darkoshi]

If you don't like the funds that the 401k offers due to the stock market risk (or other reasons), they usually also provide one very low risk, very low interest option like a money market fund. Even if you have to roll over to a different 401k plan due to changing employers, it may save you money in the long run to keep it in a 401k, in a money market fund, rather than cashing out and paying the 10% penalty. Especially if you are nearing 59 and a half in age, when the penalty no longer applies (I think).

I participate in my company's 401k because of the company match. If the company matches 100% of the first 3% of your salary that you contribute, even if you put it all in the low interest money market fund, it is like getting 100% interest on your contribution, at least for the first year.

If you don't want to be in a 401k plan at your next job, check the documentation they give you. Rather than simply not signing up, you may need to explicitly opt out.

Besides the risk, one reason I've been averse to the various mutual funds offered by my 401k is not knowing or having any control over which company's stocks are in those funds. I don't want to financially support companies that are doing bad things.

This last year I've put a portion of my 401k balance into my 401k's "brokerageLink" option, which gives more choices for the kind of companies to invest in. But I've come to realize (or at least suspect) that companies don't get much if any direct financial benefit anyway, from me investing in a fund which includes their stock. I'm not buying the stocks from that company; I'm indirectly buying them from some other investor who is selling their stocks in that company. It's the other investor getting the financial benefit, not the company whose stocks it is. The company only gets money from selling stock during the initial public offering, if I understand it right. So now I wish I had put the money in one of the default 401k funds instead of the extra hassle of the brokerageLink. I sort of dread checking how that money is doing, actually.

[mtbc]

Nice thing about more choice via brokerage-ish kinds of option is that one can often find an ETF that fits one's ethics better. Sometimes I've ended up going for sharia options (!), I don't much care about shrimp farms but at least it also cuts out payday lenders and suchlike. One word of warning: some ETFs are really not diversified, good to check the portfolio composition first.

[zipperbear]

The government has big tax incentives to encourage savings in 401k plans, so I'm not sure why you wouldn't want to participate. You need to check you plan details to see about early withdrawal penalties. If you leave your job within the calendar year that you turn 55 or later (which I think is the case, right? You'll be 55 in November, and you left your job with that 401K during this calendar year), then the 10% tax penalty won't apply. I retired in 2018 at age 52.5, so I need to use the Substantially Equal Periodic Payments rule (and keep withdrawing until age 59.5) to avoid the 10% penalty. Hardship withdrawal rules depend on both the IRS and the 401k plan, and they're mostly big ticket items, but catastrophic home repairs might qualify, maybe.

Since it becomes taxable income, cashing out this year might bump you up into a higher tax bracket. In 2021, at $40,526 the tax bracket of 12% jumps to 22% (and another big jump of 24% to 32% at $164,926), so wait to pay off your house next calendar year, and try to keep your taxable income under about $40K each calendar year. Also, I'm expecting a big stock market recovery by the end of the year (or by election day), so cashing out now is selling low, and you want to buy low and sell high.

Your older 401k plans won't have the separation-age-55 exemption, and withdrawals there will be 10% more expensive unless you meet their specific hardship rules, so you should wait to age 59.5 to cash those out. For your current 401k, ask for the age-55 exemption when you contact the plan administrator [so your 1099R will show box 6, code 2—Early distribution, exception applies (under age 59½)], and include code 01 on form 5329 when filing taxes:

Exceptions to the Additional Tax
on Early Distributions
No. Exception
01 Qualified retirement plan distributions
(doesn’t apply to IRAs) you receive
after separation from service when
the separation from service occurs in
or after the year you reach age 55
(age 50 for qualified public safety
employees).

[zipperbear]

You can also roll over any old 401k accounts into an IRA (or possibly into a new employer's 401k if they allow, but probably only while currently employed), and the same basic pre-tax rules apply, except an IRA has no age-55 exemption.

If you have any Roth 401k accounts, withdrawals are easier since the money is already taxed (and you can roll over into a Roth IRA). But I doubt they'd automatically sign you up for a Roth 401k.

I rolled my retirement accounts into one traditional IRA and one Roth IRA; it makes the 72(t) Substantially Equal Periodic Payments easier to calculate. I was expecting a direct rollover, but wound up with four monstrously-big checks from Fidelity (payable to Charles Schwab IRA and Roth IRA, For Benefit Of me, and the same FBO my husband), and then we visited the Schwab office to deposit them.

[mellowtigger]

Note to self: I found where the "age 55" rule is explained. It exempts people from the 10% penalty if they are separated from their employer in the same year that they turn 55 (or older). That definition clearly applies to me, so I'm going to pursue the withdrawal. It would be GREAT to pay off the house entirely, assuming most of the money is left after taxes.
https://www.irs.gov/taxtopics/tc558