People are cashing out their retirement accounts to pay for "emergencies"

[CitricAcid]

The downside is that they could significantly reduce borrowers' savings at retirement and create an expensive tax bill if they aren't repaid on time. Those who fail to pay back the loan and are younger than 59½ are subject to regular income tax and an Internal Revenue Service penalty tax of 10% on early withdrawal. Even if the loan is repaid on time, the borrower is repaying the loan with after-tax dollars and will have to pay taxes a second time when the money is withdrawn at retirement, advisers say.

These articles always bug me with their implication that you get double taxed when you take and repay a loan from a 401K.

If you are younger than 59 1/2 and don't repay the loan you get hit with taxes and penalty. If you repay the loan you do so with after tax money, that takes care of the loan money you owe taxes on. When you cash out your 401k later in life you pay taxes on everything that comes out. There is no double taxation as implied.

If you have $100K in the 401K and borrow $50K and pay it back, that is a total of $150K that will get taxed. $50K gets taxed when when you repay the loan and the other $100K gets taxed when you withdraw it.

No double taxation and no free lunch.

You are right when you say there is no "double taxation," but many people do not realize the provisions of the loan in that 401k money normally PUT IN to the account are not taxed, but when you take out 50k (of pre-tax dollars) and have to pay it back (plus interest) you need to pay 50k and interest back in after-tax money (65k or whatever it is). So, you are kind of taxed on your withdrawal even if you pay it back. Then when that 50k of after-tax 401k money is taken out, it is taxed. It is not quite double taxation, but the tax advantages gained by putting the 50k or whatever in in the first place is destroyed when you take a loan on it since you have to pay back in after-tax dollars.

 

[ziggy29]

You are right when you say there is no "double taxation," but many people do not realize the provisions of the loan in that 401k money normally PUT IN to the account are not taxed, but when you take out 50k (of pre-tax dollars) and have to pay it back (plus interest) you need to pay 50k and interest back in after-tax money (65k or whatever it is). So, you are kind of taxed on your withdrawal even if you pay it back.

Basically, when you borrow from a 401K plan the *interest* you pay on the loan is taxed twice, but not the principal balance which was never taxed when you contributed the money to the account or when you used it for the loan.

But if you pay (say) $5000 interest over the life of the loan, you are adding $5000 to the 401K plan with after tax dollars that get taxed again when you withdraw.

 

[Rustward]

The scarry thing about a 401K loan is that if the borrower leaves the job (for whatever reason) if the loan is not repaid within 60 days, the unrepaid amount becomes an early distribution subject to the early withdrawl penalty and taxed as ordinary income, assuming the borrower has not reached 59 1/2.

 

[armor99]

I think our culture (at least here in the US), has over the years lulled people into a false set of beliefs. On late night TV, every third commercial is one of those, "Bad credit.... no credit... no problem", type deals. The belief being promoted is... "Someone will always take CARE of you, no matter how badly you messed up, and it was not your fault anyway." I think this one idea has really taken a grip on many in the older generation that is now attempting to retire.
Some of these folks have been so dictated to over the years as to how to think, what to buy, what car is the best, that a lot of their minds have become dull from disuse over time.(Why think, when I can pay others to think for me?). I have spoken with a lot of older folks and hear comments on retirement like, "well... maybe when the economy gets better..... if the right president gets elected... after the oil crisis is fixed... etc." Notice the one thing in common with all of these thoughts? It is that some external force, or some external person will come to their aid and "rescue" them. I very rarely hear ... "and this is what I am going to do, to try to help my own situation." I think more often than not people wind up waiting for some hero that ultimately never shows up.
I guess I just have never understood how that can happen to someone. If your life is the most valuable possession that you own (which I believe is true), then how can your attention to it, and planning of it, become of such little importance to you, that you either give up the planning of it to someone else, or you ignore it completely and still expect a postive outcome? I think this cuts accross all gender, racial, and socio-economic type problems. If you accept in life the premise, that if you want to eat, you are probably going to have to do something to get it, then planning and critical thinking become very important to you. If you accept the opposite premise that others are responsible for you getting your food, then you will probably not develop those very needed skills. I learned a long time ago that I really like a nice rib-eye steak.... and more importantly what I needed to do to obtain that steak.

 

[ladelfina]

armor99, I both agree and disagree. You can't blame the cogs in the wheel for being cogs. Their function, no less than ours but in degree, is to give up most of our nominal financial gains to "the system" for processing/extraction/'safekeeping' because there is little alternative.

The only way to have TRUE financial independence is to reject the "system" entirely and live as a hand-to-mouth homesteader.

 

[ProspectiveBum]

I don't want to hyjack this thread, but you commented on something I don't understand. I have no idea of the financial conditions of any of my relatives (other than my DW ) and could not say if they could or could not "afford" retirement.

Even if I did know their "financial map", I don't have any legal (nor moral) responsibility to bail them out.

Just wondering...

My parents struggled a lot to provide for me and my brother when we were growing up so I would feel some moral responsibility to support them to a point if needed. They sacrificed a lot for me, I would feel like I owed them.

I'm sure every family's situation is unique. Like Aaron, my Dad sacrificed a lot to raise my sister and I, and I will feel compelled him help him financially if he needs it. As things stand now, it looks like he'll be working until he's 70, if he's able to.

I'm (mostly) estranged from my Mom, who is massively in debt and essentially unemployable. I won't feel obligated to support her in her old age. DW's Dad disowned all his kids after he and MIL divorced (before I knew the family). He made no effort to contact any of them until years later when he was involuntarily placed in a convalescent home due to health issues. DW doesn't intend to provide him with financial assistance. She will help her Mom if she needs it (less likely than my Dad, since her Mom at least has some assets that can cover in-home care, etc. if necessary).

rs0460a, if your folks are living, will you feel compelled to help them financially if they need it?

EDIT: Back on topic, I think my Dad may have done just what was described in the original post. He left a job recently, and while I didn't press him on it, it sounds like he cashed out whatever he had in his 401k there. I honestly can't fathom what he spends his money on, because there's no conspicuous consumption going on with him.

 

[rs0460a]

rs0460a, if your folks are living, will you feel compelled to help them financially if they need it?

Nope. I've been "on my own" since the age of 13 (no need to discuss how/why in a public forum).

What I (and my DW) have "gotten", we've done so on our own (as I'm sure many people on this forum have also done).

While I believe in "charity", I don't believe it to be automatically given to those that are your "biological family", just because of fate.

- Ron

 

[ProspectiveBum]

Nope. I've been "on my own" since the age of 13 (no need to discuss how/why in a public forum).

What I (and my DW) have "gotten", we've done so on our own (as I'm sure many people on this forum have also done).

While I believe in "charity", I don't believe it to be automatically given to those that are your "biological family", just because of fate.

That makes perfect sense, then. My wife summed up her position on her Dad by saying that "he'll reap what he sowed. Which is to say: nothing".

Lots of people who have a tough childhood just feel sorry for themselves. Good for you for making a great life for yourself.

 

[Nanita8140]

I have an aunt who is 55 years old and she has "zero" in retirement savings. She's been working "under the table" so as to recieve "section 8"(free government housing from the state of Florida). In my opinion she makes enough to pay her and her daughter's way in life, but NOOOOOOO...that would mean "BUDGETING". About a year ago, I let it out....I told her how immoral, and irresponsible she was and how bad an example she was giving to her daughter....the conversation started nicely, but it escalated....well, needless to say we don't see/talk to each other any more. There are a lot of people like my aunt....millions, I'm sure......I don't blame the "individual" only but I'm also wondering why is the government allowing this. We see/read about it everyday...people being irresponsible with their lives/finances. How many women out there say...."oh, I just got pregnant...it was an accident".....father takes off and then she collects welfare...many of these women go to another guy and "YET AGAIN" have one/or more kids!!...what is going on!!! I had my daughter at the age of 31 ...well after finishing my studies/having a home/and savings....second child came at the age of 36. And no they didn't just "poof" into existance....they came when I "allowed" them to come. This topic justs irkssssss me to no end!!!!

 

[CitricAcid]

The government needs to raise the stupid tax, I already thought it was pretty high.

 

[armor99]

While I believe in "charity", I don't believe it to be automatically given to those that are your "biological family", just because of fate.
- Ron

Well said.... the very thing that makes charity noble is that it is a voluntary choice, and not an obligation.

 

[armor99]

armor99, I both agree and disagree. You can't blame the cogs in the wheel for being cogs. Their function, no less than ours but in degree, is to give up most of our nominal financial gains to "the system" for processing/extraction/'safekeeping' because there is little alternative.

The only way to have TRUE financial independence is to reject the "system" entirely and live as a hand-to-mouth homesteader.

I cannot blame people for their own actions, why not? Shame on you for calling people that you deem less intelligent than yourself as "cogs". Unlike "cogs" as you put them... these are not all the same interchangable people. They are all individuals, more than capable of planning their own way through life if they choose to. Their function (or mine) is certainly not to "give up their financial gains" as you put it, but to live the most enjoyable life that they can for themselves. I suppose if someone really wanted to live it up in their youth, and save nothing for their retirement, and were OK with the idea of living a life of poverty in their later years, then that would be fine with me too.

 

[cute fuzzy bunny]

That makes perfect sense, then. My wife summed up her position on her Dad by saying that "he'll reap what he sowed. Which is to say: nothing".

Lots of people who have a tough childhood just feel sorry for themselves. Good for you for making a great life for yourself.

On the other hand, isnt it sad that some children learn the lessons their parents taught and dont become better people than their parents were?

 

[ProspectiveBum]

On the other hand, isnt it sad that some children learn the lessons their parents taught and dont become better people than their parents were?

I'm not sure if I'm interpreting your post correctly, CFB. An example might be helpful.

 

[cute fuzzy bunny]

Sure. Just because someone doesnt treat you the way you'd like them too doesnt mean you have to reciprocate.

I know a lot of people whose parents werent very good to their kids, but their kids still took care of them when they aged. Perhaps by some perspectives they've become better people than their parents were.

 

[ProspectiveBum]

Sure. Just because someone doesnt treat you the way you'd like them too doesnt mean you have to reciprocate.

I know a lot of people whose parents werent very good to their kids, but their kids still took care of them when they aged. Perhaps by some perspectives they've become better people than their parents were.

It probably depends on what "weren't very good to their kids" really means, but they sound like saints. You think if I ask nicely that these nice folks will take care of me in my dotage, too?

We're pretty content with the idea that treating our own kids the way we would have preferred to be treated qualifies as being "better people than our parents were".

 

[2B]

I personally like the idea of putting aged, non-productive relatives on an iceberg and floating them off to "Al Gore Heaven." My parents did a poor job of retirement planning but did pretty well when the time came. They would have rather starved than ask their kids for help. We told my father repeatedly to stop worrying about how much he was going to leave us. The retired mailman left his 5 kids about $250K. He would have done better but he kept supporting the "baby" of the family who went through serious withdrawl when Daddy no longer was covering his lifestyle. The rest of us would have rather starved than take a penny from Mom and Dad.

I would also rather starve than have my kids support me. I'd rather be drowned in a toilet than have them pay for nursing care for me.

 

[rs0460a]

We're pretty content with the idea that treating our own kids the way we would have preferred to be treated qualifies as being "better people than our parents were".

Exactly ...

- Ron