What I Learned Today - 401K Penalties

[martyb]

Marty,
Not to derail this thread, but: Taking the lump sum out of the 401K to pay for the house might be penalty-free, but it won't be tax free. That'll be a big jump in your income for that year--will probably push you into a higher bracket and cost quite a bit more directly and indirectly (e.g. loss of 0% CG rates and dividend rates within the 15% bracket, etc). Seems "nonoptimum" to pay maybe 10+% in extra taxes on this money when you could just get a 4% mortgage (which is probably only 1% real interest, after inflation) and pay it off with regular withdrawals taxed at your "normal" rate. And enjoy paying the house off with cheaper and cheaper dollars as inflation takes hold. Even if you just paid it off over 5-10 years it would smooth your withdrawals and keep them in a lower tax bracket.

Back to our regularly scheduled discussion . . .

I hear ya, & understand about the tax thing. Problem is, wife's company is one of the ones that doesn't allow withdrawals from the 401k, other than a single lump sum or else a rollover into an IRA. Kind of sucks, but that's what we are dealing with. It's nice that they pay 4% plus company profit sharing towards her account, but the withdrawal part isn't so great. We may have to go the IRA rollover route, but we really don't want to tie up the money for the extra 4 1/2 years if we can figure a way around it. It's likely we'll be buying a house in the next 2-3 months, doing a 100% VA loan if I can get a seller to pay closing, then in 3 years when she retires, try to pay off or pay mostly off. If we have to push the payoff out another 3-4 years ( when she's 59 1/2). I guess it won't kill us, since the interest rates will be so low. Looks like we might as well roll it into the IRA, if we're not going to be accessing it anyway when she's 55. At least then we could take it in several smaller amounts that would keep us under the next higher tax bracket.

 

[daylatedollarshort]

We checked the last employer plan documents several times and called a couple of times just to make sure we could do monthly or annual withdrawals from the company 401K from ages 55 to 59.5.

Then we rolled over an IRA or two plus a previous employer plan into the last employer 401K plan to have enough living expenses for 4 years in case we needed it. So far the business income has been enough but it is nice to know it is there and penalty free, though not tax free. And for next year we have to watch the 400% poverty level for MAGI, so for us it may make more sense to refinance or maybe sell and rent if we need extra cash instead of tapping the retirement accounts. The house equity would be tax free and would not increase MAGI.