JohnH Posted March 23, 2014 Report Share Posted March 23, 2014 Email exchange with a client today: Me: "You have a 1099-R showing an early withdrawal of $35K from your 401(k) because you left your employer and didn't repay it. You're going to owe about $10K-$12K of penalty plus state & Federal tax." Client: "Yes, I was expecting that. But they withheld some tax on the withdrawal so it won't hit me that hard." Me: "No, they didn't withhold any tax. The amount on the 1099-R is only the loan balance." Client: "OK, but I still saved money since I borrowed less to buy my house. I would have paid more in interest on the home loan." ======================= I'm still pondering my reply. So far, I have come up with three: 1) Huh? 2) Well, you're losing the tax free accumulation, your mortgage rate is 4% APR and this is over 30%-- oh never mind... 3) Only if your mortgage lender is run by a couple of guys named Vinnie and Guido... Any other suggestions? 5 Quote Link to comment Share on other sites More sharing options...
jasdlm Posted March 23, 2014 Report Share Posted March 23, 2014 1) You should file a lawsuit against your high school math teacher. 2) I'm glad you borrowed less to buy your house. More equity to secure the 2nd mortgage you're going to need to pay the tax on the withdrawal. 3) I charge a 3% fee for completing form 5329 for early withdrawals on 401(k) plans. I knew you would be pleased, since it's clear from the calculations you've already done that I'm a better deal than the IRS, Mortgage Company, OR 401(k) Plan Investments! 5 Quote Link to comment Share on other sites More sharing options...
joanmcq Posted March 23, 2014 Report Share Posted March 23, 2014 The client just doesn't want to know how much he screwed up. Let them have their dreams! 1 Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted March 23, 2014 Report Share Posted March 23, 2014 4) Next time you are thinking of leaving a job, give me a call. And BTW, here is your tax return. You need a payment plan with that? Rich 1 Quote Link to comment Share on other sites More sharing options...
RitaB Posted March 23, 2014 Report Share Posted March 23, 2014 4) Why don't you use your credit card to pay the taxes?5) How are your March Madness brackets looking? That's what matters.6) Do you have a whole life policy? I know a financial planner.Joan is right; he doesn't want to know. "Huh?" is my first choice, too. 4 Quote Link to comment Share on other sites More sharing options...
JohnH Posted March 23, 2014 Author Report Share Posted March 23, 2014 All excellent responses - I'll have to evaluate them to select the best. Thanks for the replies, and the laughs. Interesting thing is, he's among my higher-earning clients - probably top 10 or 15. He has an impressive job with a high-profile company. He's very smart, but not a finance guy for sure. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted March 24, 2014 Report Share Posted March 24, 2014 There are many flavors and definitions of "smart." Quote Link to comment Share on other sites More sharing options...
HV Ken Posted March 24, 2014 Report Share Posted March 24, 2014 I charge a 3% fee for completing form 5329 for early withdrawals on 401(k) plans. I knew you would be pleased, since it's clear from the calculations you've already done that I'm a better deal than the IRS, Mortgage Company, OR 401(k) Plan Investments! I like this one. 3% of 35k - that's a $1,050. payday!! Ca-ching!! 1 Quote Link to comment Share on other sites More sharing options...
mcb39 Posted March 24, 2014 Report Share Posted March 24, 2014 All excellent responses - I'll have to evaluate them to select the best. Thanks for the replies, and the laughs. Interesting thing is, he's among my higher-earning clients - probably top 10 or 15. He has an impressive job with a high-profile company. He's very smart, but not a finance guy for sure. Those are always the ones who do this kind of thing. 1 Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 24, 2014 Report Share Posted March 24, 2014 Plus, once they do something, they want to defend why it was either 1) the right thing to do, or 2) it did not really matter. 1 Quote Link to comment Share on other sites More sharing options...
JohnH Posted March 24, 2014 Author Report Share Posted March 24, 2014 Well, if you assume his 401k will lose 6% per year in value, he breaks even after about 5 years. So there is a way to rationalize taking the one-time hit. 1 Quote Link to comment Share on other sites More sharing options...
David1980 Posted March 24, 2014 Report Share Posted March 24, 2014 It could be the right choice even though the tax consequence is terrible. Perhaps without that money they couldn't have purchased a home. Comparing 4% interest rates is meaningless if they can't get a loan that covers 100% of the home price. For some, paying federal income tax + penalty on 35k in order to buy a home that they couldn't otherwise afford is a financial decision they want to make. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted March 24, 2014 Report Share Posted March 24, 2014 It could be the right choice even though the tax consequence is terrible. Perhaps without that money they couldn't have purchased a home. Comparing 4% interest rates is meaningless if they can't get a loan that covers 100% of the home price. For some, paying federal income tax + penalty on 35k in order to buy a home that they couldn't otherwise afford is a financial decision they want to make. But still an overall bad decision. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 24, 2014 Report Share Posted March 24, 2014 Hard to believe it's wise to take that much out of your retirement account, to buy a house your lender does not think you can afford. 2 Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted March 24, 2014 Report Share Posted March 24, 2014 Hard to believe it's wise to take that much out of your retirement account, to buy a house your lender does not think you can afford. I have a steak dinner says that the house is in foreclosure in less than 5 years. 1 Quote Link to comment Share on other sites More sharing options...
JohnH Posted March 24, 2014 Author Report Share Posted March 24, 2014 I have a steak dinner says that the house is in foreclosure in less than 5 years. Although there is nothing solid to suggest that at the moment, sadly I would not argue with your assessment. Quote Link to comment Share on other sites More sharing options...
mcb39 Posted March 24, 2014 Report Share Posted March 24, 2014 Hard to believe it's wise to take that much out of your retirement account, to buy a house your lender does not think you can afford. I had a client a number of years ago who did this same thing under the impression that a "hardship" withdrawal was exempt from penalties and taxes. When I broke the sorry news to him, I was really concerned and worried that he might be suicidal. In many cases I blame the administrator of the plan for not addressing and stressing the tax repercussions. Of course, they always say "I told him!" but you have to wonder how many really do and how many really care one way or another. Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted March 24, 2014 Report Share Posted March 24, 2014 I had a client a number of years ago who did this same thing under the impression that a "hardship" withdrawal was exempt from penalties and taxes. When I broke the sorry news to him, I was really concerned and worried that he might be suicidal. In many cases I blame the administrator of the plan for not addressing and stressing the tax repercussions. Of course, they always say "I told him!" but you have to wonder how many really do and how many really care one way or another. Marilyn: The administrator told the client. But just like when *we* tell them something, they do not listen... And he *left* that job. He could not *repay* the loan, right? Rich Quote Link to comment Share on other sites More sharing options...
mcb39 Posted March 25, 2014 Report Share Posted March 25, 2014 Marilyn: The administrator told the client. But just like when *we* tell them something, they do not listen... And he *left* that job. He could not *repay* the loan, right? Rich No, Wrong. As a matter of fact, he is still with the same company. He pulled himself together like the stalwart fellow he is and moved on. How many years he paid the IRS, I have no clue, but he is very much alive and active; successful at his job. He ended up selling that house an probably made enough on it to pay off the debts. I understand it was a beauty. He is now married and his wife just recently picked up their tax return. Of course, they never listen. On the other hand, they don't know what to listen for sometimes. 1 Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 25, 2014 Report Share Posted March 25, 2014 And sometimes, the 'telling' amounts to nothing more than handing them a page or two of 'information on your Plan Withdrawal' that they may or may not actually read, or understand if they did read it. I really do wish the person handling the transaction, whether a loan from the 401K or a 'hardship' withdrawal, would emphasize the tax consequences, but I expect many of them do not understand those themselves. 1 Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted March 25, 2014 Report Share Posted March 25, 2014 No, Wrong. As a matter of fact, he is still with the same company. He pulled himself together like the stalwart fellow he is and moved on. How many years he paid the IRS, I have no clue, but he is very much alive and active; successful at his job. He ended up selling that house an probably made enough on it to pay off the debts. I understand it was a beauty. He is now married and his wife just recently picked up their tax return. Of course, they never listen. On the other hand, they don't know what to listen for sometimes. Marilyn: I was referring to the OP's client. He *left* that job. Not your client. Rich Quote Link to comment Share on other sites More sharing options...
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