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I can't believe they did this - penalty free 401K withdrawals


BulldogTom

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This is stupid, stupid, stupid.   How many of our clients are going to raid their 401k's and then get the shock of a big tax bill.   And they are going to raid the account and the worst possible time, when the value of the account is incredibly low.   Locking in losses forever, paying taxes on the money, and not having a chance to recover those losses or additional earnings.

I cannot believe how incredibly stupid our leaders are sometimes.   How will our population ever learn how to use these accounts properly when every time there is an economic downturn, the government basically tells the population to treat their retirement accounts like a piggy bank.

STUPID, STUPID, STUPID.

Off my soapbox now.

Tom
Modesto, CA

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2 minutes ago, Max W said:

Tom, what would you say to a family that is living paycheck to paycheck and is suddenly out of work?  Suck it up?!  I have never found the 10% penalty to stop anyone when they needed the money.

Tom...as tax professionals we obviously see the negative side to raiding 401k's.   With that said, I agree with Max on this one.  Desperate times call for desperate measures and some folks would probably be considered desperate for sure.   Some will raid it, just to raid it though.  Foolish but not much we can do about that. 

My 401K is now a 201k but I have high hopes that it will get back to it's high at some point in the not to distant future. 

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17 minutes ago, cbslee said:

I believe they have 90 days to return the money to the fiduciary.

They have 3 years to return it all and not pay any taxes. They can spread the tax over 3 years if they don't intend to pay it back.

It remains to be seen how this will work in years 1 and 2. Will they have to pay taxes and later amend if they pay it all back?

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27 minutes ago, Max W said:

Tom, what would you say to a family that is living paycheck to paycheck and is suddenly out of work?  Suck it up?!  I have never found the 10% penalty to stop anyone when they needed the money.

The unemployment boost of $600 per week, no waiting period, should be able to cover most of what is missing from payroll for a lot of those folks.   That is $15 per hour for a 40 hour week on top of what they would normally get from their state.   I am not heartless about this, but this situation is temporary and congress did something to take care of the massive layoffs.  I can't agree with this one, no matter how hard I try to see the compassion that others do.   It is long term damage to these people's financial health.

We are just going to have to disagree (respectfully) on this one.

Tom
Modesto, CA

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When clients call (which is not as often as they should) I tell them we should look at the cost of various sources of money. 401(k) withdrawals will cost them at their marginal tax rate, including their rate three years from now if they spread out the taxes; but could cost nothing if they can budget for repayment. Unemployment benefits are a VERY good deal now. Cash advances on a credit card can be pricey, but they should look at the rates (and not assume cash advance rates are as low as purchase rates). New options for SE individuals have opened up via state and federal governments, including unemployment benefits. Home equity loan &/or line of credit. Borrow from parents. Look at all possible sources of income and compare costs.

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There are all kinds of options during this crisis that are not normally available. I understand Tom's point, and would hope that the increased unemployment would enable most people to navigate this difficult time without going so far in debt that they will never see daylight again.  On the other hand, trying to navigate what is available and how to apply for it is often EXTREMELY confusing, and the people who need the most helpful often lack the resources or education to be able to figure out what is available to them.  

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12 minutes ago, Abby Normal said:

If they have a 401k, they can take a loan and have extended repayment terms, and not have to worry about taxes unless they eventually can't pay it back.

The catch in structuring as a loan instead of a penalty free withdrawal under this new provision, if for some reason the employee does not return to work and can not pay it back in that year, then the employee ends up with a taxable deemed distribution all in one tax year instead of being taxable over the longer three year spread.

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Calm down, everyone, and back away from the keyboard if you feel the urge to attack another member here.

Tom was venting some frustration, and we're all going to have some added frustration or stress as we try our best to help clients that are in financial difficulty. 

This topic already has some valuable information and insight that others may find helpful. Keep the ideas flowing. We're going to need them.

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A problem we see is that some will see "penalty free" but they hear "tax free" and then they don't even read the part about paying the tax over three years because in their mind, it is tax free.

And those are the ones that don't give us the 1099R "because it is not taxable.... just like the ones who don't think their distribution needs to be included on the return because "I already paid tax on it".  Yes, we tell them, they withheld some tax, but it IS INCLUDED!

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The ox is in the ditch for lots of people.  No matter how badly they want to work, they can't.  They need help from whatever the source and pretty much regardless of the future consequences.  Some will make wise decisions, while others will find themselves with unexpected tax bills next tax filing season because they misunderstood or ignored the rules.  And even those who plan poorly will at least owe 10% less than they would have otherwise. 

If I were in that situation,  I'd rather have to set up a payment arrangement for a huge tax bill and deal with it for the next 5 years than leave a nicely funded 401K for my heirs in the next couple of months.  

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