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401k.10% early withdrawl penalty? Who gets it?

S

Sunny 5 acres

Member
If you take a distribution and dont make all the qualifications you get smacked with possibly 20% federal with holding and a 10% early withdrawl penalty. My question is where does that 10% go to? Cant find anything on it anywhere on the net. Does the irs keep it or the plan administrator or who?
 
It is an income tax, goes to the IRS. So the distribution is taxed at whatever your current income tax bracket is, plus 10 percent.

I have only one word to say about taking an early 401k distribution: DON'T.
 
The only way to correctly make withdrawals out of a 401K plan is to take a loan against the account. (which I dont recommend to anyone) My ex-BIL took out a loan of $30,000 to buy a boat.....Not a good idea.
 
Why is that? I took mine out back in 07 after reading what Peter schiff and others had to say about the coming crash they were right and I lost 10% when I pulled my 401(k) money but others in the group lost up to 80% when the market went down, now why wasn't pulling it a good idea?Also used a good chunk of the money to buy Silver which is now selling for about 8 times what I paid for it back in 07 that 10% ain't crapo now.Plus the US Dollar is loosing about 10% of its real value every year so every 401(k) holder is loosing buying power every year they leave it in.Thats smart?
 
One of the reasons that buildings will topple or become unstable is if too much weight is at the top. That is what has happened to many companies that were once stellar work places for long term employment which was the backbone of America's economy.
Where did the money go? Back in the early 1980's, people with "influence" helped pass the 401K plan. The 401K name comes right from the IRS rules. It was "sold" to us as another or supplemental retirement plan. What really happened? Companies gradually turned the 401k in to the ONLY retirement plan outside of SSand personal savings. That money went in the pockets of the top officiers in companies.
Greed is killing us.
Between many jobs being dissolved or sent to foreign countries, and our own top officers raiding retirement funds and shutting down the old plans, they have slowly but surely made us and our dollar almost worthless.
We can only hope that the few that end up with most of the money will find it useless and cannot buy anything.
 
What is wrong with taking a loan out against a 401k. I did when I was off work from surgery so I could pay some bills. I now repay at 4.25%. The interest goes to me. The remaining balance is averaging about 2%. I think I am ahead on what I borrowed.
 
Trad, you p***ssed away 10 percent of the value of your 401k when you took a distribution. Not to mention losing out on the money you could have made on the money you paid in income tax on the distribution.

Personally, I think you're making the whole thing up and you've never had a nickel in a 401k or IRA. But let's suppose you're telling the truth, and you knew the stock market would tank in '08. You took your money out, less 10 percent and taxes, let's say less 30 percent. You then put it in an interest bearing account, earning maybe 2 percent interest. So four years later, you have about 76 percent of what you started out with in your 401k. The only difference being it is has now already been taxed. Which won't do you much good if the leading GOP candidates have their way and abolish capital gains tax.

Now let's say you left it in and the market tanked. Well, the market is back about where it was before, so you really wouldn't have lost any money if you had left it in.

But why didn't you simply do a rollover to an interest-bearing IRA? That way you would have preserved your capital without being hit by taxes and penalties. That brings me back to my original point: You never had any money in a 401k in the first place, otherwise you would have known that. Or at least someone smart enough to predict the '08 market collapse and the rise of silver would have known.
 
I've never taken a load against my 401k, but that's a much better option than a distribution, assuming your plan allows it.
 
Actually lots of companies had NO retirement plan, it was only the government employees and the big unions that pensions. Now nearly all the big union companies are broke and the government employees are marching in the streets over the fact taxpayers are not willing to pay for their 40+ years of planned retirement.

As my long dead father said the 401K is the government's way of telling you not to plan on Social Security being there, looks like he was right.
 
Agreed.

If you are going to have money borrowed I'd borrow it from your 401K. Most plans have a prime + interest rate set up, ours is prime + 2% that you pay yourself. It pulls the money out of a fluctuating market and locks in your return.

I would also be as careful about borrowing money from your 401K as you would from any other lending institution. Debt for boats, vacations and other unneeded items should be avoided.

Our plan doesn't allow for "inservice" distributions, borrowing is your only option unless you think quitting is a good financial move.
 
(quoted from post at 12:58:06 09/16/11) What is wrong with taking a loan out against a 401k. I did when I was off work from surgery so I could pay some bills. I now repay at 4.25%. The interest goes to me. The remaining balance is averaging about 2%. I think I am ahead on what I borrowed.
Click to expand...

Yeah, that's what I was wondering. If you could afford the payments out of your check, maybe that would be the way to go.
 
You can roll it over into a savings account IRA and not have to pay the 10% or any income tax if you are wanting out of Los Vegas East ( Wall Street).

Kent
 
I rolled my 401K into a self directed IRA when I retired. One thing, my 401K was limited to a small group of mutual funds. I now have a much better portfolio.
 
The only way to "correctly" take money out is to remove the money from the stock market and then put in a money market that is still in an IRA based account. If you take the money out to put in your personal bank account or your wallet then you made a super dumb move, cause the IRS will get 30%+ the 10% penalty.
 
Actually "raiding" a 401k plan is not possible unless the CFO of the company wants to go to prison. It is against the law to steal money out of a company 401k account, it has never happened to my knowledge at any of the companies I have worked for. Besides if a 401k is managed correctly an investment company "manages" the accounts of the investors, (employees) and the company you work for has very little to do with it other then having payroll deductions.
Now raiding a pension account that is different, the company runs it, owns it, contributes to it, so they may raid it to make the AP and payroll that month. I dont know how legal that is.
 
The whole thing about 401Ks and IRAs won"t matter, after the FedGov TAKES all that money and rolls it into what is known as a GSA, or government savings account. What a great deal it will be. You"ll earn a guaranteed 4.5% on the account. Which will be invested in Government bonds. Of course when you die, your aires won"t get any of it. It all gets absorbed by our wonderfull government. They have already had hearings on this plan. It"s just a matter of implementing it. The stage has to be set properly, to sell it to the sheep, er, people. The Gov will ride in to the rescue and announce this great plan, and how it"s going to "Save" your retirement funds. After the stock market crashes again. It"s going to happen, Because we are all looking at an illusion right now. With the phoney market being held up by QuanitiveEasing, Or, The mass printing of money by the gov and given to the banks. After the next big crash, Don"t be surprised when you hear the talk/propaganda about this great plan, and how it"s going to "Save" peoples savings. They will probably sell it by telling people they will get a percentage of what they lost, back. Face it, This country has a terminal debt/unpaid future entitlement problem. The FedGov won"t think twice about taking all that gravy in those 401Ks and IRAs to survive just a little longer.
Jack
 
Not many small town business owners offer a 401K. I had one for two years out of the 41 years I worked full time. After I retired I took out a little at a time and each time they asked, do you want the taxes taken out now, I said noooooo, I don't make enough now to pay income tax. I do pay self empl tax but that is a whole different thing as you only need to make either 4 or 6 hundred to pay that. Don't remember off hand which.
 
If I'm not mistaken, there is a hardship clause that says if you meet certain conditions, you are exempt from the 10% penalty. Might pay to check it out.
 
I been retired for 11yrs now. Don't depend on the gov't to feed you. I would have been in bad shape if it had not been for my 401K. The stock market is iffy but, Gold won't multiply. It is not an investment, you can't eat it. It is a lot like Emus except you won't have to feed it. One of these days the value will come crashing down. I know-- some people made a lot of money on Emus to. Tell me why people are spending thousands of dollars per minute trying to sell gold on TV. If it is such a good investment, why don't they keep it and save their advertising cost.
 
Gold is real money. Has been for centurys. Fiat currency, on the other hand, is backed by NOTHING but the government's word. Look at what they are doing right now. Europe and American central banks printing and devaluing our (Fiat) money. Just yesterday our central bank promised a fresh flood of dollars to help with the Greek and Italian money/debt woes. They are crashing our money's worth. Who knows what's going to come out the other side from this. But, I'd rather have something actually worth something than a handfull of fancy printed toilet paper.
Jack
 
I worked for Farm Credit in the early '90's- we had a "defined benefits" program- you get a fixed pension amount at retirement, based on salary and years of service. There was a big push by all companies then to switch folks over to a "defined contribution" plan- a 401k that you contribute to, employer matches up to a point, and you're on your own. Company offered to "buy out" our pensions by contributing a lump sum to a 401k. I was reluctant, because it didn't seem like they were offering enough, based on what my pension would be.

The push was from "headquarters". My boss was a real "company man", and I figured he'd do it immediately, then join the pressure from Spokane. He mentioned the conversion one day, and I figured, Here we go- let the games begin. I told him I didn't want to do it- and was surprised that he didn't, either! In a very "un-company-man" statement, he opined that the very fact that they were pushing so hard led him to believe it would be very favorable to them, and therefore unfavorable for the employees.

I left Farm Credit in a "reduction in force" in 1995, and he retired a couple of years ago. We are both happily drawing our pensions. If I had converted, and drawn the same amount monthly as I have been getting from the pension for the past 7 years, I'd have run out of money several years ago, based on interest rates as they actually are (1%) vs. what they were projecting at the time (6-8%).
 
The 10% is a "tax penalty" and it goes to the general fund like any other IRS penalty.

However regarding the tax implications in general, you’re not thinking far enough ahead. Yes the "25"% fed withholding will be with held. The 10% will not. Nor will state or local tax. The money will show up as income for that year affecting you’re state and local tax. Not to mention any bump in brackets for them and the fed. A good starting point is to figure 50%. The actual number will end up between 40 and 60% depending on income level. So plan on taking 25% of your distribution and forwarding it to various gov agency"s.

As mentioned in the other post loans are nice from the stand point you are paying yourself most of the interest. But can become a real burden if you lose your job. They normally they are - make scheduled payments (based on pay cycles) or pay it all off at once. Neither a real good option while looking for work. Any outstanding loan when employment is terminated will be treated as a distribution and unless you continue to make the payment or pay it off. Plus with a load default, there is no withholding and you are on the hook for it all (BTDT).
 
Yeah, that's the problem, they are running out of money to spend. They are going to come up with more inventive ways to get that money.
Hold on to your wallet.
Jack
 
I get a monthly payout from 401K (301K?) with a tax withheld but not early withdrawal as was over 59 1/2 at time of withdrawal started. Early Social Security is not state taxable so the other half of current 'income' doesn't count for state taxs. Still pay some at end of tax year to federals. 401K helps get by with minimal hassles, would be hurtin' some with just SS. RN
 
When I took it out yea I paid the 10% but never came close to paying 30% on the rest because I quit the company in Jan and had farm expenses to offset most of the money from the 401(k) which myself and my accoutant worked out ahead of time as I didn't need to make money on the farm that year so I could take a big loss on it.Leaving money anywhere these days like banks is for Idiots drawing almost no interest while the US Dollar goes down at least 10% per year and will probably decline quicker in the future.Checked the news today? The Fed here in the USA is guaranteeing the
loans to collapsing economies in Europe.Printing huge sums of Money in the future will be the only choice they have which will devalue the US Dollars you are holding.But you'll have a lot of company and misery loves company.BTW it wasn't me that figured out the last collapse was coming but listened to people who had been right about such things in the past.I'll take Peter Schiff's and Jim Rogers advice over about anyone elses and both say the US Dollar is headed for Collapse.Both also are still saying hard commidities (real money) like Gold and Silver are the place to be they've made me a lot of $$$$ in the past so I'm sticking with the proven winners.
 
Agreed.

It's pretty much impossible for a company to "raid" a legal 401k plan. The money goes into your account and only the owner (employee) can make withdraws, its like saying a company can raid your checking account because you have a direct deposit set up.

Where a company can screw the employee is if they are not depositing the money into their 401k accounts after withholding it from their checks. That game can only go on for so long. Federal law requires that the deposits are made as soon as the amount can be accurately computed and reported - usually 10-15 days after month end. Any longer than that and a complaining employee could easily trigger an IRS audit and the people violating that law will quickly find themselves sharing a cell with Chester the Molester.
 
A company my wife used to work for (she was an accountant there) didnt pay the investment company the monthly deposit of the employees. The company was 2 days late and the day after the due date the investment company called and said.....Ummmm....You have to deposit that money now. Because they are buying securities with the money, they want the commissions and dont want to default. This company has 500 employees there.
A 401k is nice because there are safeguards in place to prevent a crooked owner, or his wife/partner from stealing a pile of money. If it was easy to steal 401k money you would hear of a lot more executives/business owners going to prison.
 
The Federal government gets the extra 10%. Depending on your plan structure it may have the 10% penalty end at an earlier age. Our company's plan dropped the 10% if you retired at age 55 or later. If you retired earlier then age 55 the standard 59 1/2 age rule applied. Loans can be a good deal if it is for a business venture. Problem is you are limited to $50,000 or no more than 50% of your account balance, which doesn't go very far today. I borrowed a couple of times for farm down payments, and since it was a business could deduct the interest although I was paying it back to myself via the 401K plan. Like having your cake and eating it too. Only issue is the $50,000 limit or it would be the greatest scheme the non-wealthy can utilize.
 
Gold is way overpriced. Silver is somewhat overpriced.
I dont think of real money in terms of precious metals, other than copper jacketed lead.
I think of real money as assets, like a home, truck, food, fuel, guns/ammo.
 
The company must be paying the penalty for the employee, they can't tell the IRS not to charge the 10%.
 
My Brother-in-law who is big into the stock market told me the very same thing back in about 06 when Gold was around $300-$400 an ounce and Silver was around $5 ounce so I guess he showed me huh? Gold and Silver are headed up because paper curriencies in the US and Europe are getting ready to fold because they're printing them nothing to back them up.Worse yet most people have their money tied up in a bank and nothing to show for it but figures on a computer screen.Now thats security!Gold is a currency really the currency all others are judged against.
Like you I also believe in guns,real estate and food and the ability to grow food and keep warm.
Gold and Silver are a 'money' that will be accepted as a medium of exchange when people have no more faith in the paper they hold.
 
Yes, but.....

The Ratio of Gold to the national debt is 2.5%. Yep, 2.5% of 14.5 trillion dollars is the amount of gold we have in the US treasury. Makes me sick. But you and I have other hard assets, real estate, ammo, I have been stocking up on food, but, it is hard to stock a years worth of food. I easily have 6 weeks or so.
 

stocking up on food ---guns fuel and a truck and tractor--toss in a fishing pole and a little country boy wisdom and the food problem is covered.
 
I chose to pull all my money out of my ira and out of the stock market. As it worked out the 10% was cheap compared to what I would have lost when the market tanked. I put that money into real-estate, which had already tanked, Even if it does lose value I'll still have a place to live and have my garden. As it's working out I have rental income and the property is increasing in value.

The problem with ira's,401k's etc is that your hiring someone you don't even know to manage your money. I don't like that. Neither did the Enron,GM etc. employee's who are now broke instead of enjoying retirement.
 
Like he said before. He decided to take out his 401k and actually DID something with it before he died. Big deal. I did the same thing. I have different 401 plans and closed one out this year and made a CASH offer on a farm. Since I was one of the first to make an offer on the place and actually had the money they sold it to me. They had a list of over 10 other people who were trying to figure out financing on the deal. Yes I paid the 10% penalty and I also paid about 28% income tax on my regular earnings and on my 401 withdrawal and it was a lot of money to send the IRS. I really didn't care. I am fine with it. I could have taken out a loan and paid a bank a couple hundred thousand extra dollars in finance charges to finance a farm loan for 30 years. I watched my money drop a lot in 2008 and a lot of it came back but not all of it. The dow was at 14500. You can put your money away all your life and die before you ever get to use any of it. I really don't care anymore what wall street tells me to do. I know what's best for myself. I don't want to be 70 years old and to worn out to do anything before I enjoy any of my money and If I died sooner than that it would be a total waste. My friend just died at 59 and never got any 401k money out or any social security. The stock market has become an extremely risky game of chance. More like gambling than investing. I am also sitting on the sideline in money markets until I figure out if I want to get back into any mutual funds. Right now I like watching from the sidelines. As you get older it's more about protecting what you have in there as opposed to making a lot more. In other words I'm trying to protect the money I have rather than trying to get my greedy claws on more. The Dave Ramsey 12% mutual fund gains are turning into science fiction. I'm gravitating towards cd's that pay 2% rather than risking my money on stocks. To each his own. I may draw the rest out, pay the penalties again and put it in a jar buried in the back yard.
 
Don't think so but could be wrong. Believe it depends on how the company sets it up. Since we can retire from the company with a minimum fifteen years service at age 55, perhaps they were allowed to move the 401K non-penalty withdraw date to the same age. Don't know for sure but indeed it works. Unlike some of the others, I strongly encourage 401K contributions. With a lot of help from that asset, I was able to purchase farming parcels ranging from $1000-2300/acre and in this area they are now bring as much as $10,000/acre. Might not be able to duplicate this in today's enviroment, but the future is uncertain and if the opportunity again surfaces, a significant 401K nest egg would be a great enabler.
 
I had GM bonds and I almost lost $10k. But....I was lucky that the bonds ended up trading on the pink sheets and I got all my money back when the trading price went up to $7.70, I sold all 1000 bonds that I had and actually made 6% in 3 years. (still wasnt worth it)
My BIL lost $60k in his 401k at work. He is a GM employee, oops.
The "new" GM stock IPO was $33 I think and it is now down about 8 or 10 bucks from the IPO. GM doesnt even offer a dividend, Screw them.
 
You said, "government employees are marching in the streets over the fact taxpayers are not willing to pay for their 40+ years of planned retirement".

Fact, you say??
In actuality, the thieving politicians have been pretty successful in spreading the lie that the government worker is some sort of a freeloader that's expecting a pension solely at the taxpayer's expense. I paid 6% of my earnings, every single payday, into the pension fund. The state of Illinois, by law, was supposed to match my 6% and deposit that match into the fund too. Just like social security (only at a 1/2% savings to everyone). They have NEVER held up their end of the bargain in the 45 years that I have been involved with them, and now they treat US like villians because THEIR thievery is causing the system to fail. It's bad enough that they robbed us, but now they want to turn the public against us too. Kinda like it being the woman's fault that she got raped. At least the rapist goes to jail. And if you, as a private employer, tried the same trick with your employees, you'd go to jail too. But not the politicians - in Illinois, they're spending millions on coloring books for kids to color in a likeness of the elected official giving out the books, but they side-step around the pension obligation. We have one ex-governor in jail, and another ex-governor on the way to jail, but that's just barely scratching the surface as far as I'm concerned. Anytime you hear a politician use the word "entitlement", be aware that it's doubletalk for "step on the working man's neck".

Nothing personal to you in this reply, I'm just tired of being made to look like some sort of a freeloader. And to the original poster - I have no experience with a 401K.

Paul
 
And I failed to mention in my previous rant - many public employees, like myself, are not eligible for social security, not that it would matter - the politicians have been stealing from the SS fund for decades too.

I have a VERY dim view of politicians, no matter what stripe they wear.
 
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